Canadian Retail Markets Study

A Review of Competitiveness in the Canadian Refined Petroleum Marketing Industry
Prepared For: Industry Canada Natural Resources Canada Canadian Petroleum Products Institute

September 15, 1997
Suite 413, 1333 - 8th Street SW Calgary AB T2R 1M6 Canada 403-283-8704

Table of Contents
List of Figures _____________________________________________________ i List of Tables ______________________________________________________ ii Executive Summary _______________________________________________ iii Introduction _______________________________________________________ 1 Background Study Overview Report Format and Conventions Acknowledgments An Overview of the Model Competitiveness: The Pump Price Model in Motion Canada’s Petroleum Industry: Upstream and Downstream Upstream Industry Petroleum Refining Petroleum Marketing Taxation on Petroleum Products Pump Price/Margin Model: An Integrated View Marketing Sector Overview Competitiveness in the Retail Gasoline Sub-Sector Retail Gasoline Demand National Retail Petroleum Outlet Representation Retail Petroleum Outlet Modes Outlet Throughput Ancillary Services Gasoline and the Consumer Price Index Key Price History Margin History Canada vs. US Price History Rack Price History Demand vs. Price History 1 2 2 2 4 5 7 8 9 12 14 16 17 19 23 24 25 28 29 30 31 32 34 35 36

Part A Pump Price/Margin Model ____________________________________ 4

Part B The Structure of the Retail Petroleum Products Sub-Sector ________ 16

Part C Historical Trend Analysis ____________________________________ 30

Part D Selected Markets Study ______________________________________ 38

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Introduction Methodology Study Market Findings Market by Market Competitive Analysis Findings Conclusions Recommendations

38 38 42 52 72 74 80

Part E Findings, Conclusions & Recommendations _____________________ 72

Appendices _______________________________________________________ 82 I Glossary of Terms________________________________________________ 83 II Source Data Tables ______________________________________________ 85 Table A: CPI Index: Selected Goods and Services Table B: Key Price / Margin History - Regular Gasoline Table C: Canadian Supply, Inventory, Demand, and Pump/Rack Prices Table D: Pump Price History - Study Markets Table D: Pump Price History - Study Markets (cont’d) Table E: Ex-tax Pump Price History - Study Markets Table E: Ex-tax Pump Price History - Study Markets (cont’d) Table F: Rack Prices - Study Markets Table F: Rack Prices - Study Markets (cont’d) Table G: Study Market Data - Throughput and Price by Grade Table H: Study Market Data - Rack Price, Tax (by Grade) Table J: Study Market Data - Blended Prices, Costs, Margin Table K: Study Market Data - Sales, Revenue, Outlet Costs, Income Table L: Study Market Data - Demographic Profiles 85 86 88 90 91 92 93 94 95 96 97 98 99 100

III Sources of Information about the Downstream Petroleum Industry____ 101

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........................... 45 Figure 22: Petroleum Gross Product Margins .....................................................Price History......................................Price History.................. 40 Figure 18: 1995 Average "Blended" Pump Price ... 43 Figure 20: Ex-Tax Pump Price Elements ................... Gross Product Margin ...................................................... 31 Figure 11: Monthly Prices 1990-1996 (Nominal $) ....................................... 24 Figure 6: 1995 Retail Outlets by Province .......................................... 18 Figure 4: 1995 Refined Petroleum Products Demand by Product Category...................................................... 46 Figure 23: Average Annual Throughput per Outlet........................... Income........................... 53 Figure 28: Vancouver ...................................................Price History ............................................................. 49 Figure 26: Outlet Revenues............................... 4 Figure 2: 1996 Average Prices/Margins .........................List of Figures Figure 1: Pump Price / Margin Model....Price History ...............................Price History ...............................tax............... Costs................ ex-tax elements ............ 62 Figure 33: Ottawa ........Price History........................... 25 Figure 7: Outlet Representation by Mode..........Price History ............................................................................... 24 Figure 5: Canadian Retail Outlet Population .................................. 58 Figure 32: Toronto ........................................................Selected Centres ....................Price History ..... 54 Figure 29: Calgary ................................................................................Price History .................................................................................................................................................................................8¢ Pump Price) ............................................................................. 35 Figure 16: Monthly Demand vs.......................................................... 69 Figure 36: Halifax ....................................................................................Regional & Urban Groupings...................... 71 MJ ERVIN & ASSOCIATES i ..........................................Price History..................................... 42 Figure 19: Pump Price .. Pump Price (nominal ¢/litre)...Selected Goods & Services ..................... 56 Figure 30: Regina ............................Regular Unleaded .................................... 33 Figure 13: Monthly Gross Marketing Margins............................................................................. 36 Figure 17: Study Market Methodology .......................................................................................................................................................................... 48 Figure 25: Outlet / Volume Relationship ................ 44 Figure 21: Gross Marketing Margin Elements ..................... 50 Figure 27: Victoria ....... 63 Figure 34: Montreal ............... 28 Figure 8: Outlet Representation by Service . 30 Figure 10: CPI Index Comparison ........................................... 34 Figure 15: Monthly Rack Prices: Selected Markets ................................................................................Price History................................................. 16 Figure 3: 1996 Average Regular Gasoline Margins (56........................ 66 Figure 35: Saint John NB ................................... 57 Figure 31: Winnipeg ................... 34 Figure 14: Canada / US Monthly Pump Price (Nominal $) ............................................................................................................................................................................................................................................ 47 Figure 24: Outlet Volume vs... 70 Figure 37: Charlottetown ...........................1988-1995 ...................................................... 29 Figure 9: Annual Gasoline Price (Cents per Litre) ...................................... 32 Figure 12: Monthly Margins 1991-1996 (Nominal $)................................

...... 15 Table 3: Selected Study Markets .................................................... 1996 ... 39 Table 4: Estimated Cash Flow from Consolidated Net Revenue....................List of Tables Table 1: Downstream Sales Channels ................. 13 Table 2: Taxes on Regular Gasoline on December 31.................................................................................................................................................................... 51 MJ ERVIN & ASSOCIATES ii .....

3 ¢ CRUDE PRICE source: Natural Resources Canada The model shows that in 1996. This Retail Petroleum Markets study provides a practical tool for understanding the dynamics of this vital and complex industry. the Canadian retail marketing sector realized an average gross product margin of 3. and the Canadian Petroleum Products Institute (CPPI). represented by crude.5 ¢ 0. rack. Price competition occurs at three distinct levels in this industry. These prices are determined in a competitive marketplace.8 ¢ TAX 28. and ex-tax pump prices.3 ¢ 28.6 ¢ EX-TAX PUMP PRICE RACK PRICE DOWNSTREAM MARGIN MARKETING MARGIN REFINER MARGIN UPSTREAM PRODUCT MARGIN FREIGHT 3. 1996 Average Prices and Margins .1 ¢ 5. This margin represents gross income (after wholesale product cost and freight costs) available to provide for retail marketing operations including outlet costs. together with a separate review of the refining sector. Pump Price/Margin Model The study presents a model which serves to illustrate the interrelationships between the many stakeholders who ultimately receive the revenue from the sale of a litre of gasoline. The model also illustrates that each sector margin is defined by the price at which feedstock or wholesale product is bought and then sold.4 ¢ 19.2 ¢ 24.Regular Gasoline 10 City Average NOT TO SCALE PUMP PRICE 56.5 cents per litre on the sale of regular gasoline in a typical major urban market. supplier costs and profitability. and a foundation for effective policy development. forms a comprehensive overview of the competitiveness of the downstream petroleum industry in Canada. each with unique MJ ERVIN & ASSOCIATES iii . dealer income. Natural Resources Canada (NRCan). This study.Executive Summary Study Objectives The Canadian Retail Petroleum Markets Study is a joint initiative of Industry Canada.

The Canadian retail gasoline marketing sector is but one element of a much larger industry infrastructure. The Structure of the Retail Petroleum Products Industry Retail petroleum marketing is typified by the retail “gas station” outlet. this study focuses on the retail gasoline sector. nine of the past ten years. While each of these marketing channels operates in a competitive environment. Approximately 16. due to its prominence in the public and media domain. From 1986 to 1995. and accordingly. well over half of all outlets in Canada operate as lessees or independents. the responsibility for deciding upon retail pump prices resides principally at the local dealer level. are examples of ways in which outlet petroleum sales are augmented by other revenues. Statistics Canada (Constant $) MJ ERVIN & ASSOCIATES iv . Ancillary or non-petroleum revenue is an increasingly important feature of the retail gasoline marketing industry. ex-tax pump prices declined by 4 cents per litre measured in nominal dollars. demand and other competitive factors existing at the time. car wash.500 retail outlets were in operation in Canada in 1995. and the traditional automotive service bay.dynamics. Convenience store. The resultant margins are therefore a reflection of the state of product supply. compared to about 22. Annual Gasoline Price in Cents per Litre 60¢ Nominal 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Source: NRCan 15¢ 1986 1987 1988 Including Tax Constant $ Excluding Tax Nominal Constant $ 1989 1990 1991 1992 1993 1994 1995 Source: Natural Resources Canada (Nominal $). encompassing several marketing channels which provide a range of petroleum products to industrial and domestic consumers. which potentially allow for reduced margins at the gasoline pump.000 in 1989. Historical Trends Changes in the average gasoline prices in Canada have remained at or below the “All Items” Consumer Price Index (CPI). and declined by 10 cents per litre measured in constant dollars. Dealers have a variety of relationships with their supplier.

while (average) combined gross refiner and gross marketing margins decreased by about 7 cents per litre. Canadian average ex-tax pump prices in major markets have been virtually identical to those of the United States since mid-1994. Monthly Margins in Nominal Cents per Litre 30¢ Tax Content 25¢ 20¢ Canada Avg.crude) 5¢ Marketing Margin (retail . and has been a result of several factors including: • • • improved refinery utilization and efficiency. both refiners and marketers have experienced a decline in margins as a result of price competition at the rack and at the retail pump. improved retail outlet sales performance as a consequence of retail outlet rationalizations and demand increases.rack) Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Apr-91 Oct-91 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96 0¢ source: Natural Resources Canada Despite an upwards trend in world crude prices since 1991. as a consequence of refinery plant rationalization (closures) and a modest demand increase. the average tax content of regular gasoline pump prices in major Canadian cities increased by about 5 cents per litre. This has both resulted in. MJ ERVIN & ASSOCIATES v .The “tax-included” nominal pump price increased over this same period. however. Regular Gasoline Downstream (Marketing + Refiner) Margin 15¢ 10¢ Refiner Margin (rack . As a result of these trends. From 1991 to 1996. and emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs.

but also had significantly higher throughputs per outlet.Comparison of Canada. to derive 1995 average petroleum gross product margins for each of the 19 markets. This provided for market-bymarket and regional comparisons of key competitiveness indicators. wholesale product cost and freight charges) were isolated from the pump price. several “outside variables” (product taxes. although this study provides an independent confirmation of this. When petroleum gross product margins were compared to their corresponding outlet throughputs. the 19 study markets exhibited a high degree of correlation in gross product margin as a function of outlet throughput. were selected for a detailed review of outlet economics. MJ ERVIN & ASSOCIATES vi . That such a relationship should exist was not surprising. With few exceptions. 19 markets representing a broad range of conditions. rural markets. and one by one. A wide range of petroleum gross product margins were evident. which led to two key findings: • Larger population centres and their surrounding communities consistently exhibited lower pump prices and narrower gross product margins than smaller. proprietary 1995 operating data were collected on a total of 481 retail outlets in the selected market groups. US Monthly Pump Prices 65¢ 60¢ 55¢ 50¢ Price per litre 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Apr-93 Oct-93 Jan-93 Jan-94 Jul-93 US Pump Price (Cdn ¢/l) Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-95 Jan-96 Oct-96 Jul-94 Jul-95 Jul-96 Excluding tax Canada Pump Price US Pump Price (Cdn ¢/l) Including tax Canada Pump Price source: Natural Resources Canada Selected Markets Study As part of this study. With the participation of several CPPI member companies. a distinct pattern was demonstrated: an inverse relationship between retail gross product margin and the average outlet throughput associated with that market. in order to identify market and/or regional competitive differences as potential issues or opportunities within the industry. from 3 cents per litre in Toronto to 14 cents per litre in Gaspé. This was integrated with selected NRCan price data.

962 R2 = 0. head office and regional office overheads. supplier overhead: all operating costs of the supplier that are not directly associated with a single outlet.000. corporate charity. and/or distributed to shareholders. These costs would include salaries of marketing representatives and management. sales processing. This study showed that an average outlet net revenue in the 19-market study group was about $70. revenues from ancillary operations (eg: convenience store.6624 1.000. etc.000.000 6. and in major vs. Relationship of Gross Product Margin to Outlet Throughput (1995) 18¢ Peace River Thompson Chicoutimi Saint John Charlottetown Gaspé 16¢ Victoria Vancouver White Rock Calgary Regina Winnipeg Ottawa Sault Ste Marie 14¢ 12¢ Sioux Lookout 10¢ 8¢ 6¢ Nanton 4¢ Toronto 2¢ y = -4.000.6634Ln(x) + 76. which represents the source of cash flow for three distinct purposes: • • dealer income/profit: the return or salary to the dealer.000 Volume (litres) 4. an additional goal of this study was to undertake a comparison of outlet profitabilities.000.000 3. and his personal labour investment.000 5. the residual revenue is available as profit to be re-invested into retail operations.000 2. supplier profit: after the above costs are allocated. • Using market-determined rack prices as the basis for establishing petroleum gross product margin and its related revenue. brand advertising. car wash) and outlet costs were factored into the market study analysis to derive a complete measure of average outlet income (in absolute dollars) in each region.000 Halifax Montreal 0¢ source: MJ Ervin & Associates Although a comparison of petroleum gross product margins to their corresponding throughputs was shown to be an effective competitiveness analysis tool. which reflects his investment in the outlet.• Smaller markets performed as competitively as larger centres. Consequently.000. this study estimated that within the 19- MJ ERVIN & ASSOCIATES vii . not poor competition. smaller markets. and the higher prices (and margins) generally seen in these markets were a function of poor volume performance.000. of which gross product margin and throughput are only two of several factors..

000) $(150. by all objective measures available to this study. it was likely due to profitability in the refiner side of operations in the case of integrated refiner/marketers.000 $200. rural market outlets were likely to be no more profitable: supplier overhead costs associated with maintaining rural. but that outlets in smaller (Group B) markets had higher outlet incomes than major (Group A) market outlets .000 $150. The Canadian retail petroleum products industry. a variety of available data suggests that a state of vigorous competition exists in the Canadian petroleum marketing sector.000 vs.000) $(350. and that petroleum sales revenues alone. respectively. 1.000) $(100.000) 1: Net Retail Petroleum Revenue 2: Ancillary Revenue 3: Outlet Costs 4: 95 Consolidated Retail Outlet Income source: MJ Ervin & Associates The study also showed that very little fundamental difference in outlet profitability existed between regions.000) $(200. distant outlets are clearly higher than those associated with concentrated urban markets.000) $(250. Although an objective measure of competitiveness is elusive. suppliers likely incurred a net loss on outlet operations in 1995.000 $250. $61. at 1995 prices.000) $(300. were insufficient to cover outlet costs. or due to lower nonoutlet overhead costs which are likely achievable by regional and independent marketers.000 per year. Conclusions The study findings lead to a number of conclusions relating to the competitiveness of Canada’s petroleum marketing sector. was shown to be strongly competitive: MJ ERVIN & ASSOCIATES viii .000 $50.000 $100. after allowing for estimated dealer profit and supplier overhead.$154. Average Outlet Income (before marketing overhead costs) BC/PR $300.market study group. for which this study had no specific data.000 $($80) ON QU/AT Group A Group B All Study Mkts $(50. The study showed that the average urban outlet would experience a net loss without the contribution of ancillary operations. Despite this difference. Where the actual corporate results of petroleum marketers showed 1995 profits from their downstream operations.

A long-term decline in pump prices, when measured in constant and nominal dollars, was observed (Finding 10). This has not simply been a result of a decline in underlying raw materials costs; the very margins within which this industry operates has, over the long term, exhibited a diminishing trend (Finding 13). On a national level, in comparing Canada average (city) pump prices to those of the United States, Canadian prices have been at or below US prices in recent years, when taxes were excluded (Finding 14). In comparing several diverse markets, a consistent pattern of competitiveness emerged when comparing product margins to their associated average outlet throughputs (Finding 18).

These findings are likely in sharp contrast to a common public perception of this industry in general and price trends in particular. Virtually all of the competitiveness indicators examined in this study relate to price. As described in this study however, price is but one of four competitiveness “tools” available to marketers (product, place, and promotions are the other three). Closer examination of these strategic tools might yield additional insights into the nature of competition in this industry sector.

2. The economic relationship of the petroleum marketing sector with its related stakeholders is a complex one.
Critical to the overall success of this study was the development of a model which would create a common frame of reference for the considerable terminology that accompanies an industry as complex as Canada’s petroleum sector. The study presents such a model, which also serves to illustrate the interrelationships between the various stakeholders who ultimately receive the revenue from the sale of a litre of gasoline. This price/margin model illustrates that the various sector margins are a consequence of the prices at which feedstock or wholesale product is bought and then sold (Finding 1). The contrary notion that a given refiner or marketer is free to establish a price based upon a minimum margin requirement, is mistaken. Rack and pump prices are determined in competitive marketplaces, each with unique dynamics. The resultant margins, which at times can decline to very low or even negative values, are thus a reflection of the state of product supply, demand and other competitive factors existing at the time. In applying such a model to the retail petroleum marketing industry, it is important to understand that, while crude oil markets are considered global in scope and rack product markets are considered regional in scope, retail petroleum markets are considered local (municipal) in scope, since this is the effective range of consumer choice. This implies that the competitive dynamics pertaining to these retail markets can, and do, vary considerably from one population centre to another. Dealers were shown to have a variety of relationships with their supplier; well over half of all outlets in Canada operate as lessees or independents, and accordingly, the responsibility for deciding upon retail pump prices was shown to reside principally at the local dealer level (Finding 9).

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While some markets, particularly smaller ones, experienced higher than average pump prices, when the “outside” factors (tax, rack price and freight cost, for example) were rationalized, the resultant margins were found to display a distinct relationship with average outlet throughputs for each market. A much more accurate barometer of industry competitiveness would therefore be the rack-to-retail or gross product margin, measured against the average outlet throughput for that market. This would entail the tracking of not only pump price, but also rack prices and outlet performance, an exercise that consumers are unlikely to engage in, but not beyond the reach of any organization wishing to truly understand petroleum competitiveness issues.

3. Taxation is a significant factor in the price of retail gasoline, and in some markets, presents a competitive disadvantage to Canadian marketers.
This study’s analysis of NRCan urban regular gasoline prices shows that the tax content in a typical consumer’s gasoline purchase is about 50 percent (Finding 4). By contrast, crude costs accounted for roughly 34 percent (Finding 2), refiner margins accounted for 5.3 cents or 9 percent (Finding 5), and product margins accounted for 3.5 cents, or 6 percent (Finding 6) of the 1996 average regular pump price. Petroleum product taxes are levied at the federal, provincial, and in some markets, municipal levels of government. The latter two can vary considerably from one market to another, and are a predominant cause of inter-regional pump price differences (Finding 16). The measurement and analysis of the effect of petroleum taxation levels in Canada compared to other countries is well beyond the scope of this study, but given its magnitude, taxation as an element of public policy is an area worthy of additional research. Due to the localized nature of competition in the retail gasoline marketing sector, taxation differences between Canadian and US markets, or even between Canadian markets with differing tax structures, generally do not serve as competitiveness inhibitors. The demonstrated exception to this is in markets directly adjacent to nearby US markets, but even in such cases, these markets have managed to sustain a certain level of viability and competitiveness. Canadians nevertheless enjoy one of the lowest average gasoline taxes in the industrialized world, second only to the United States.

4. Pump price fluctuations can be an indicator of competition in the marketplace.
Demand for gasoline was shown to vary significantly according to the time of year, in a highly distinct, predictable seasonal pattern. Retail pump prices showed a corresponding seasonal pattern, reflecting consumer demand behavior (Finding 15). This relationship between price and demand was cited as the essence of competitiveness in the petroleum rack marketplace, which in turn is the principal

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driver of ex-tax pump prices. Viewed from this perspective, fluctuating prices are a strong competitiveness indicator (Finding 7). Retail pump price changes showed a close relationship to underlying rack prices, which in turn, showed a close relationship to underlying crude prices (Finding 11). Rack prices were shown to not significantly differ between major centres, further suggesting that a strongly competitive environment exists in the refiner sector as well (Finding 3). While price wars are undoubtedly an indicator of competitiveness, the absence of price war activity does not imply a lack of competitiveness. This study’s marginvolume model could detect no difference between price-volatile markets such as Toronto, and more price-stable markets such as Sioux Lookout, on the basis of price fluctuation alone. In fact, Sioux Lookout, a price-stable market, exhibited competitive traits typical of any of the study markets, when examined on the margin-volume model.

5. Retail gasoline marketing revenues, on a per litre basis, constitute a small portion of the retail pump price.
The pump price/margin model shows that in 1996, the Canadian retail marketing sector realized an average gross margin of 3.5 cents per litre on the sale of regular gasoline in a typical major urban market (Finding 6). This margin represents gross revenue (after wholesale product and freight cost) which, incorporated with ancillary revenues and outlet costs, is available to provide for all retail marketing operations including outlet costs, dealer income, supplier costs and profitability. This consolidated outlet revenue, when distributed these three ways (Finding 20), translates into supplier profits of an estimated one cent per litre of petroleum sales in the case of smaller markets, and a loss in the case of urban markets, which represent the majority of Canada’s population base. While these findings are somewhat qualified in terms of this study’s use of posted rack prices as the derivation basis, it can still be concluded that the petroleum marketing sector constitutes a small portion of the total retail pump revenue distribution.

6. Declining refiner and marketing margins, have caused, and have resulted from, intense competitive pressures in the downstream industry in general, and the marketing sector in particular.
Changing conditions in Canada’s downstream petroleum sector have caused retail pump prices to remain relatively flat since 1992, despite increases in tax content and crude costs (Finding 12), both of which are beyond the direct influence of Canada’s oil companies. A truly objective barometer of downstream industry influence on retail pump price lies in the measurement of margin, not price. Since 1991, the combined downstream (refiner and marketing) margin in Canada decreased by about 7 cents per litre (Finding 13). This trend has both resulted in, and has been a result of, several competitive strategies, including:

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Thus. most markets. When these margins were compared to their corresponding outlet throughputs. this industry sector would have realized profits of unprecedented proportions. 8. Thus. if Canadian average pump prices were only one cent higher than they were in 1995. not excessive profits. Both the downward trend in margins. crude costs. serve as perhaps the most significant indicators of competitiveness in the downstream industry. That such a relationship should exist was not surprising. Also. although this study provides comprehensive evidence of this. Although some smaller markets appeared to have higher gross MJ ERVIN & ASSOCIATES xii . although pump prices in some markets can fluctuate by several cents per litre in the course of a week. virtually all of the 19 study markets exhibited similar levels of competition. despite the predisposition of many observers to use them as such. had petroleum margins which were commensurate with average outlet throughput for that market. a distinct pattern emerged: an inverse relationship between retail gross product margin and the average outlet throughput associated with that market (Finding 18). most outlets used in the 19-market study represent major integrated oil companies. and in turn. A wide range of petroleum gross product margins were evident within the 19market study group. It is likely that regional and non-refiner marketers operate with somewhat smaller overhead costs than those used in this study. the rack price basis used in this study may understate actual revenues by about 1 to 2 cents per litre. Annual residual profits available to petroleum marketers is in the order of perhaps one cent per litre. 7. When plotted against the margin-volume model. but to increases in underlying rack prices. Nevertheless. in the long term these fluctuations are likely more reflective of market restorations. these findings clearly show that pump price increases are ultimately linked not to increased profits. assuming all other costs were unchanged. Also. Outlet throughput is a key determinant of inter-market pump price differences. emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs. Industry profitability is extremely sensitive to very small changes in pump price. Thus. profit margins in this sector can be stated to be in the order of 1 to 2 cents per litre in a “good” year. Indeed. pump price signs are particularly ineffective as a barometer of petroleum marketer competitiveness and profitability. based upon an assumed posted rack price. from 3 cents per litre in Toronto to 14 cents per litre in Gaspé. improving retail outlet performance through outlet rationalizations (closures) resulting in higher unit throughputs (sales volumes). While these economics might appear to place this industry in a position of poor viability.• • • improving production efficiency through refinery plant rationalizations (closures). and the associated industry initiatives which are ongoing in nature. regardless of size.

in order to generate sufficient revenue to cover the outlet’s fixed operating costs. In suggesting this approach however. Low ancillary revenues Outlets in smaller centres received significantly less ancillary revenue than their group A counterparts. other factors exist which contribute to relatively high margins and prices. • • At first glance.5 million fewer litres of gasoline than a group A (major centre) station.product margins than larger markets. High distribution costs Smaller markets are generally further removed from their source rack point than larger centres. A full-serve retail gasoline outlet typically employs 3-5 staff. which should. and this study showed that gasoline prices were no exception. reduce pump prices. The loss of employment represented by a station closure may be of some concern to smaller communities. and therefore suffered an additional distribution cost disadvantage of about 2 cents per litre on average (Finding 17). reducing the number of outlets may also reduce the number of competitors. Some impediments to market exit may exist in the form of petroleum underground storage tank regulations which may present to the operator the option of pumping gas as the better alternative to decommissioning the site and possibly incurring prohibitive remediation costs. according to the margin-volume model. average pump prices were relatively high. MJ ERVIN & ASSOCIATES xiii . Smaller. This was due to three factors: • Low average outlet throughputs The average group B outlet sold approximately 1. which could actually inhibit competition. the solution would be to encourage some dealers to exit the market. • The particular competitiveness and viability issues facing smaller markets is an issue worthy of further study. it would seem that if local government in smaller markets were interested in lowering pump prices. likely due to the different geographic and lifestyle differences that exist in small communities compared to major cities. poor outlet throughputs were generally the predominant factor. 9. more isolated markets are generally higher than in larger centres. The costs of most consumer goods in smaller. there are three points to consider: • • In very small markets. thereby improving petroleum volumes and ancillary revenues at the remaining sites. While competitiveness in most smaller markets was shown to be as active as in larger centres. isolated markets face particular challenges: although found to be highly competitive. This created some economic pressure to sell product at a higher pump price. in order to build upon the findings in this study towards a full understanding of the dynamics at work.

is viewed as an agency which exists to the benefit of industry and consumer alike. and in turn. The 19-market study provides some insights into the issue of whether or not regulated retail gasoline markets serve to benefit consumers (Finding 22). As these findings show. and likely others in Nova Scotia. and the traditional automotive service bay. Government intervention into petroleum marketing is likely a poor alternative to market-based regulation. This competition then. This will be driven by the depressed petroleum product margins which currently exist in the petroleum marketing sector. A full analysis of the various features of the Nova Scotia and PEI regulatory structures. under the current PEI regulatory structure. depressed petroleum revenues. possibly to the detriment of the consumer. the degree of price competition in the retail petroleum has in effect. characterized by narrow product margins and relatively flat pump prices. Recommendations This study advances two recommendations to enhance the existing competitiveness in Canada’s petroleum marketing sector. as marketers find even more innovative ways to attract market share. were cited as examples of ways in which outlet petroleum sales are augmented by other revenues. many national and local environmental regulations exist for good cause. are an acceptable limitation on pure competition (Finding 8). MJ ERVIN & ASSOCIATES xiv . Retail ancillary operations are a critical element of petroleum price competition. Ancillary or non-petroleum revenue is described as an increasingly important feature of the retail gasoline marketing demography (Finding 19).10. Convenience store. is well beyond the scope of this study. does not appear to benefit in consumer terms. The historical record is clear however: since deregulating pump prices. sometimes below that of outlet operating costs. and the perceived effect on their markets. The federal Competition Bureau for example. car wash. 11. the Halifax market. that where a healthy competitive climate exists. as it does in the Canadian petroleum marketing sector. has seen a decline in pump prices relative to other Canadian markets. will likely preserve a highly competitive petroleum market. and as such. Charlottetown. direct regulatory interventions may have an adverse effect on competitiveness. is both the cause and consequence of increased activity in ancillary operations. Also. This is not to say that all direct government intervention into marketing practices is certain to produce undesirable results. Non-petroleum revenues at retail gasoline outlets will continue to gain prominence. This study proposes rather.

Regulatory Intervention: Historical and theoretical research into government regulation of petroleum markets. and the nature of competitiveness influences. Industry and government have an opportunity to continue to work together in cooperative research similar to that which this study represents. 2. along the lines of the model used in this study. Ways in which this gap can be closed might include: • Ongoing third party evaluation of prices. This study alludes to several potential study initiatives which go well beyond the objective of public awareness and may assist both the public and private sector policy and strategic directions: • Price/Margin Modelling: Development and adoption of a standard price model and associated terminology by industry/government. A regular comprehensive competitiveness evaluation. Improve public understanding and awareness of competition in the petroleum marketing sector. Public perception measurement. in a simple format designed for consumers and legislators. Individual companies within the retail petroleum industry have been reluctant to speak directly to the issue of gasoline pricing and competitiveness. Develop cooperative industry research into marketing sector competitiveness issues. and the converse image held in much of the public domain. A recurrent theme arising from this study’s conclusions is the likely gap that exists between the demonstrably high level of competition within this industry sector. margins and competitiveness factors. petroleum marketing competitiveness. not inhibit. This study might be used as the concept basis for a comprehensive annual update of price/margin trends and selected market competitiveness research. Marketing Strategy Effectiveness: Research into price and non-price marketing strategies and their relative influence on consumer response. Research into the specific competitiveness issues of concern to consumers would provide valuable direction for groups conducting industry competitiveness research. • • MJ ERVIN & ASSOCIATES xv . using Canadian and foreign selected markets. using Canadian and foreign selected markets. would ultimately be reflected in carefully-considered public policy which serves to truly enhance. This should be in the form of a quarterly summary of price trends and related measurements. • • Would this enhance the competitiveness of this sector? It is felt that better public understanding of this industry’s record of competitiveness.1. Organizations such as the Canadian Petroleum Products Institute and the Petroleum Communication Foundation would therefore have an expanded role to play in commissioning and regularly disseminating the results of these recommended initiatives.

is vital if Canadians are to put in place the structures that truly meet their social and economic needs.• Small Market Competitiveness: Detailed research into small market outlet economics and competitiveness. • * * * Better understanding of this industry. MJ ERVIN & ASSOCIATES xvi . and issues/opportunities facing such markets. Taxation: An analysis of taxation levels on industry and consumer behavior and as a tool of policy and revenue. using Canadian and foreign selected markets. and regulators alike. by industry. consumers. A better comprehension of the true issues and opportunities facing this industry would be an important step in the right direction towards stable and effective policy. and in particular. Lack of understanding of this industry can lead to misguided policies which benefit neither the industry nor the consumer. the possible effect of underground storage tank legislation as a potential impediment to market exit and as a competitiveness inhibitor.

and a challenging array of potential environmental initiatives. or petroleum marketing portion of the study.. which comprise the “downstream” oil industry.. and in the process. .. A working group represented by Natural Resources Canada (NRCan). Project Objectives The working group established as the primary objective of this study “.to help the industry cope and to enhance competitiveness. including a regional.. or even communities within the same region. The SCF laid the foundation for supplementary studies.to analyze the rack to retail market and the market structure for refined petroleum products.to provide a sound database upon which more effective policy decisions can be made. competitive pressures from US and offshore refiners. Industry Canada completed a Sector Competitiveness Framework (SCF) for the Canadian refined petroleum products (downstream) industry. region by region across Canada. This would have several advantages: it would objectively explain the sometimes significant pump price differences that can exist between regions.” An additional study objective was that an assessment of the viability and competitiveness of regional markets be made. the Canadian Petroleum Products Institute (CPPI). and MJ Ervin & Associates was selected to undertake the “rack to retail”.to determine the key factors which drive competitiveness in specific markets.. provide a model for better understanding the nature of competition and pricing economics within the petroleum marketing sector. In 1995. and in comparison to the Canadian national average and nearby USA markets”. The objective of this project was to improve understanding of the issues affecting the long term competitiveness of this industry. and regional differences which face the petroleum products retail industry. and . face a number of challenges: a poor public image. .. more detailed economic model of the industry from the rack price point (eg: the refinery plant) to the retail pump. leading to more effective policies and reduced uncertainty for future investment.... Specific purposes of this study would be: • • • • “.to draw comparisons with nearby USA markets.. and Industry Canada was convened to undertake this project.to better understand the competitive opportunities and challenges..Introduction Background Canada’s petroleum refining and marketing sectors. to name a few.. and that issues and challenges be identified so that conclusions and recommendations can be made “.” MJ ERVIN & ASSOCIATES 1 .

Study Overview This study is in five parts: Part A: Pump Price/margin Model presents a conceptual model for understanding the interrelationship between various subsectors of the petroleum industry. Supporting data to these charts can be found in Appendix II. Part B: Retail Structure serves to provide a general overview of the retail gasoline sub-sector in terms of infrastructure. • Part E: Conclusions and Recommendations summarizes the study findings and. through a multi-faceted approach. Part C: Historical Trend Analysis provides an overview of prices. due to the considerable data gathering difficulties that such an approach would entail. margins and demand patterns over the past several years. Report Format and Conventions • • • • We have defined terms which may be unfamiliar to the reader. Acknowledgments Three organizations were of considerable assistance in the development of this study: MJ ERVIN & ASSOCIATES 2 . and a foundation for effective policy development. Many of the findings in this report are presented in graphical form. or which have a specific meaning in the context of this report. Unless otherwise stated. presents conclusions and recommendations which arise from the study findings. It also relates consumer demand patterns to pump price fluctuations. Findings are stated in bold and are summarized in part E of this report. margins and related implications for market competitiveness than can simply be provided by existing public-domain data. it provides a comprehensive tool to understand the dynamics of this vital and complex industry. and in order to provide insights into the range of competitive dynamics that can exist. Ultimately. in Appendix I. Specific comparisons of specific Canadian and US consumer markets were not made.The study meets these objectives. from which some important findings are made. and the effect of competitiveness on each subsector. Part D: Selected Market Study presents the findings of a diverse 19-market study. undertaken as part of this project to: • make a more detailed examination of price. The study does provide comparisons with US markets on a national level of detail. all prices and margins referred to in this document are stated in nominal Canadian dollars or cents (ie: not adjusted for inflation). an examination of a diverse array of markets in order to determine the degree of dissimilarity or similarity between them.

and Shell Canada. Suncor Inc. through the involvement of Cindy Christopher and Jack Belletrutti (now with CPPI). Natural Resources Canada. NRCan. CPPI. Petro-Canada.. including Ultramar Canada. Suncor Inc. Petro-Canada. for their assistance.. chaired the steering committee. assisted in securing the support and participation of member companies in the selected markets phase of the study. and provided critical guidance and feedback at several key stages in the process. Ministère des ressources naturelles du Québec. facilitated some of the data gathering needs of this study. Environment Canada. Imperial Oil Ltd.. Ontario Ministry of Environment and Energy. through Maureen Monaghan and Huguette Montcalm. MJ ERVIN & ASSOCIATES 3 . and Industry Canada. several companies made a significant contribution by providing us with retail outlet operating data used in the selected market study.. and their 481 retail associates whose outlet data was used in our analysis. Finally.• Industry Canada. through Bob Clapp. We gratefully acknowledge these companies. and also participated in the steering committee. Shell Canada. The Canadian Petroleum Products Institute. These included: Canadian Tire Petroleum. • • Several organizations participated in two key review sessions. Consumers Association of Canada.

unlike many consumer products. but simply. pump price changes as displayed on the street sign provide no real insights into the factors which drive competitiveness in this industry. or taste. public attention towards the competitiveness of this industry is most focused during a time of gasoline pump price increases. Yet.Part A Pump Price/Margin Model Although Canada’s petroleum industry is a vast. the particular quality of gasoline which is of most interest to consumers is not its colour. And. To understand competitiveness and pump price economics in the Canadian retail gasoline sector requires a clear understanding of the interrelationships between the principal stakeholders who ultimately share the revenue from the sale of a litre of gasoline. These relationships can be modeled. most Canadians relate to this industry in one specific way: as consumers. principally of motor gasoline. The interface between each of the stakeholders in this model is defined primarily in terms of the price at which product is transferred (sold and then bought) from one sector of the industry to its neighboring sector. as they are in Figure 1.which is used by many groups and individuals to assess the competitiveness of the petroleum industry. An Overview of the Model Figure 1: Pump Price / Margin Model NOT TO SCALE PUMP PRICE TAX DOWNSTREAM MARGIN MARKETING MARGIN REFINER MARGIN UPSTREAM PRODUCT MARGIN FREIGHT EX-TAX PUMP PRICE RACK PRICE CRUDE PRICE MJ ERVIN & ASSOCIATES 4 . In fact. its price. It is this particular feature of petroleum products . multifaceted industry. This price/margin model thus creates a common reference for understanding the economics of retail gasoline. texture.price . as this study shows. and serves to explain several factors that together determine retail gasoline prices at any given time.

this study examines competitiveness from the latter. typically the retail price (the price at which the product is sold) less the wholesale price (the price a marketer pays for a product). an understanding of the term itself is necessary. This section represents the basic model of pump prices and margins shown in Figure 1 not as a fixed view of what pump prices and margins “should be”. (implying that the stated margin represents net income or “profit”). “competitive” may be synonymous with “viable”. Ultimately however. objective measurement for competitiveness. evaluating competitiveness is therefore a partly subjective process. any operating expenses must then be considered before making any determination of profits. The revenue from the consumer purchase of a petroleum product (such as gasoline) is split among four key sectors. margins are squeezed or expanded accordingly. 1 The revenue from a petroleum sale filters down to the principal stakeholders in various ways. A consumer however. Gross margin is simply the difference between two price points. gross margin represents revenue only.or margin . these stakeholder revenues are derived from the revenue from the retail sale. MJ ERVIN & ASSOCIATES 5 . A General Definition of Competitiveness Since understanding and measuring downstream industry competitiveness is a general goal of this study. Before examining each of the model elements. So defined. From an industry perspective. each essentially taking a share1 . is more likely to equate the term with “value for money”. this study’s use of the term relates to gross margin. consumer perspective. Each margin is quantified by its defining prices. but as a dynamic model in constant motion: as competitive forces act to move various price points up and down. Competitiveness: The Pump Price Model in Motion EX-TAX PUMP PRICE RACK PRICE CRUDE PRICE One of the key questions this study seeks to answer is “Is the gasoline marketing (ie: rack to retail) sector truly competitive?” As there is no standard.Many of the terms introduced and explained in this section are used extensively throughout this study. it is important to define the term “margin”. While both perspectives are valid.from the total pump revenue. While this term is often associated with the phrase “profit margin”. and in fact inextricably related.

and ideally many entities offer the same or similar products (brand variety). Accordingly. and at least one of the competitors wishes to improve its revenue by gaining a larger share of the market (profit motive). Since a competitive market effectively limits the price option. in the sense in which it is something in the public interest. Conditions for a competitive market can be deemed to exist when: • • more than one.” “. represents a process by which prices are set. competitive activity can be observed when a competitor alters one or more of MJ ERVIN & ASSOCIATES 6 . An effective functioning of markets also permits smaller competitors to expand if they meet the test. They are sources of creative destruction by which monopolies or inefficiencies are destroyed and new entrants and greater efficiency are encouraged. More importantly. in order to maintain some level of brand variety. The actions by business rivals place an upper limit on the prices a firm can charge for its products. In competitive markets the prices of the various competitors inevitably tend toward the same levels because all available cost-savings techniques will be adopted by all the (surviving) competitors. reducing costs.Competition means therefore an effective functioning of markets which promotes and requires rivalry amongst competitors for the business of consumers. one must ask how marketers compete.. as competitors seek to attract market share through lower prices. Technological change and innovation are the large levers of competition in industry. the degree of competition within a market. a universally acceptable definition of competitiveness is elusive. it can frustrate communication and obscure analysis. competitors can either restore higher prices or reduce costs. or in other words.. and unless care is taken to use the word precisely. To achieve this. is the only real option in the long term.Unlike many business or economic concepts. This market condition requires that competitors consciously seek to attract business away from each other by price and other means and in turn. improving efficiencies. 1986: “Competition may mean very different things to different people. Simply put. Inevitably. and the entry of new competitors and new ideas. provide some means for comparing the type and to some extent. any attempt at arriving at an objective measurement of competitiveness would be subject to considerable debate. the result of price competition is reduced profit. this usually requires a reasonable number of competitors. Competition can only be sustained therefore. Price competition. This study therefore attempts simply to identify and illustrate competitiveness indicators which together. A useful explanation of competition in the petroleum marketplace was advanced by the Restrictive Trade Practices Commission report “Competition in the Canadian Petroleum Industry” in May. such actions by rivals continuously pressure a firm to lower its costs in order that the highest prices the market will permit it to charge enable it to earn a sufficient return of investment to attract investors. if market conditions allow a sufficient number of players to remain profitably engaged.” Price Competition in the Oil Industry In order to assess competitiveness.

• Thus described. While those who reside in oil producing regions such as Alberta often think of the oil industry in terms of crude oil and natural gas exploration and production. Nevertheless. 4th Ed. which focuses more on the infrastructure and mechanisms which promote or inhibit competitiveness at the retail level. Place.44 (1st Dec. where upstream oil producers compete on a global scale to sell crude oil to petroleum refiners. the raw material from which gasoline is made. is false. the “oil industry” consists of two distinct industries: the upstream industry. (Homewood. so a brief description of these. A refiner in Toronto may well compete with a refiner in Buffalo. Price. most Canadians relate more in terms of retail gasoline marketing. p. or four P’s: Product. where petroleum refiners compete on a continental scale to sell refined petroleum products (eg: gasoline) to retail marketing organizations. but a retail dealer in Toronto is more concerned with the competitive threat posed by other dealers within perhaps a 1 to 2 kilometer radius. the geographic scale of competition is an important consideration. in turn determined by competition on a continental (Rack Price) or a local (retail pump price) scale. and as will become more evident in this study. It is also important to stress that the market ultimately sets rack and retail pump prices.: Richard D. commonly known as the “marketing mix”1. in rack markets. competition acts to self-regulate prices in three distinct marketplaces2: • • in crude oil markets. and the downstream industry. and a comprehensive description of retail price competition follows: Canada’s Petroleum Industry: Upstream and Downstream The “oil industry” can mean many things to many people. which in turn defines a proper market price. and in retail markets. MJ ERVIN & ASSOCIATES 7 . some organizations have operations in two or more of these markets.. where retail gasoline dealers compete on a local scale to sell gasoline to the motorist. In fact. Within the broad context of the oil industry. Given the commodity nature of petroleum products. 1971). and Promotion. competition in the crude and rack markets deserves some mention. which in turn defines the margins. Irving. Ill. Jerome McCarthy. and are generally known as integrated oil companies. 1960) 2 Although distinct. whose main 1 E. and are beyond the scope of this study. the most effective of these as a competitive tool is price. Basic Marketing: A Managerial Approach. The dynamics of upstream and refiner competition are major studies in themselves. particularly in the crude (upstream) industry and refiner sector. New York. Finding 1: Refiner and Marketing Margins are a consequence of their defining prices.the variables at their disposal. The converse notion that the industry establishes a “should be” margin. whose main activity is the exploration and development of crude oil.

The upstream industry’s crude price is represented in Figure 1 as elastic. which it does on a continuous basis.activity is the refining of crude oil into petroleum products. MJ ERVIN & ASSOCIATES 8 . our crude prices rise and fall according to price benchmarks established far beyond our own shores. that is to say. While this study focuses on the downstream industry (and in particular. rather than a fixed value. and refinery production methods. in several commodities trading centres around the world. production. which finds and produces crude oil . Competitiveness in Crude Markets The nature or extent of price competition in the crude oil marketplace is a subject of considerable debate. from the exploration for potential crude or gas reserves. consequently. this study uses a fixed percentage of the Edmonton Par crude price as a standard assumption. Canadian producers have virtually no influence over world crude prices. Although this industry is not the focus of this study. and the delivery and sale of these products to the consumer. due to variables such as crude quality. Within the scope of this study. a brief discussion of its relationship with the upstream industry is useful: Upstream Industry CRUDE PRICE UPSTREAM The starting point of the pump price model is commonly referred to as the upstream industry. implying that it fluctuates. It is difficult to precisely quantify the upstream “content” in the price of a litre of gasoline. its marketing operations). it is probably sufficient to say that. alongside major producing countries such as Saudi Arabia. drilling.the raw material from which gasoline is made. and in the open market structure that exists in Canada. Infrastructure The upstream oil industry encompasses a broad range of operations. Canadian producers are known as “price takers” rather than “price setters” of crude prices. In providing historical comparisons of crude to rack/pump prices. Canadian producers must compete to sell their production to refiners. Crude oil is a commodity which is traded in a global marketplace. which gives an accurate portrayal of month-to-month crude price fluctuations. it is important to examine its relationship with its neighboring downstream industry. gasoline grade. and transportation of crude oil to the refinery plant. as a minor contributor to the world crude supply.

As is typical of many manufacturing organizations. is the provincial government. day-to-day plant operations are cost-intensive. its predominant feature is the plant facility which. put simply. personnel. diesel. and lubricants.While some suggest that the price of gasoline should rise and fall exactly with the crude price. one of the key attributes of this sector is the very high capital cost of a refinery plant facility: roughly one billion dollars in today’s dollars. Although a description of the process of turning crude oil into gasoline is outside of the scope of this study. In addition. As a general measure: Finding 2: 1996 average crude price. drill for. and from this feedstock.1 cents per litre. who manufacture petroleum products from crude oil. heating fuels. manufactures a range of refined petroleum products including gasolines. oil producers must explore for potential reserves. From this revenue. which in oil producing provinces such as Alberta. This sector acquires crude oil. and hopefully realize some production. in the petroleum sector. maintenance. buy refined products from the refiner and sell them to the end-use customer. Petroleum Refining DOWNSTREAM MARGIN RACK PRICE REFINER MARGIN CRUDE PRICE Within the downstream oil industry there exists two distinct sectors: refiners. Infrastructure The petroleum refiner sector represents the manufacturing stage of the life cycle of petroleum products. is called the refinery. Some discussion of the interface between refiners and marketers is essential to a full understanding of the marketing function however. A modern refinery is a sophisticated work of engineering. crude is only one of several factors that influence pump prices. as a factor of the regular gasoline retail pump price. and some attention to the refiner sector is therefore given here. and pay out royalties to the resource owner. The focus of this study is on the marketing sector of the downstream petroleum industry. was 19. or roughly 34 percent of the pump price. and numerous safety and environmental safeguards. and marketers who. involving energy. MJ ERVIN & ASSOCIATES 9 .

and a return on the considerable capital investment in the plant facility.Price/Margin Model Elements For simplicity. indicative of a competitive wholesale rack market. the gross refiner margin is elastic.the price charged for immediate supply on an “as available” basis. representing major Canadian population centres. For a competitive rack market to exist. Since both crude and rack prices fluctuate according to market forces. the pump price model uses the term “rack price” to refer to the refiner’s sale price of refined petroleum. which provides an independent and objective determination of rack-based gross refiner margin. The existence of rack price in a given market is not of itself. only rack price information is readily available in the public domain. not the refiner sector. some clear competitiveness indicators exist. Although contract and transfer prices are distinct from rack price. In fact the refiner typically pays a higher price than the benchmark crude price. The Bloomberg Oil Buyers’ Guide™ currently lists twenty Canadian rack points. This margin provides for plant operating costs as described above. Of these three refiner prices. which can be broadly categorized as follows1: • • • rack price . Wholesale volume data is not readily available on a market-specific basis. external measurement of the current market value of a particular petroleum product. confidential terms between the seller and specific buyers. refiners sell their product under a variety of arrangements. and accordingly. but with no material effect upon the Gross Product Margin derivation. In simple terms. If for example. Historical data is readily available for crude and rack prices through publications such as Bloomberg Oil Buyers’ Guide™. the gross refiner margin is the price at which the refiner sells its refined product. a considerable volume of petroleum product must actually trade using rack price as the transaction basis. there would be little or no market-driven competitiveness in the refiner sector. less the price at which it bought its raw material2 (rack price minus crude price). In fact. transfer price . contract price . Contract and transfer prices are not openly shared. Canadian refiners produced only sufficient product to supply their own networks of retail facilities. which may cause Gross Refiner Margin to be slightly overstated.this is the “internal” price charged by a refiner to the marketing arm of the same company. the relative competitive strength of any given rack market is difficult to assess. as this price point exists within the marketing sector. many of which do not have integral refineries. this model only uses the benchmark crude value. they use rack price as their basis. On a national basis however. as they relate to negotiated. since the market-driven rack price provides an objective. While refineries are always rack price points. 2 MJ ERVIN & ASSOCIATES 10 . rack prices also exist at many nonrefining centres where there is sufficient wholesale demand for petroleum product.the price charged to a non-refiner marketer (or other sales channel customers) usually under the terms of a long-term supply agreement. being squeezed or expanded between these two price points. reflecting the cost of transporting the crude from the producing region to the refinery plant. For simplicity. 1 Dealer Price is not included here.

but where pipeline or marine fuel terminal facilities exist. this limits a marketer to a relatively short range (perhaps 1. In examining the structure of the Canadian refiner sector. due to the relatively small transportation cost.for example. In practice. wholesale refined product is bought and sold across very large distances. Integrated Refiner-Marketers In Canada. from any one of several regional refiners. the question of the internal selling price. integrated refiner-marketers establish transfer prices at. it follows that: Finding 3: The infrastructure of the Canadian refiner sector provides the necessary conditions required for competitive. to so-called “independent” petroleum marketers. In practical terms. and which supply petroleum to about one-third of all retail outlets in Canada1. There is no “windfall” profit in setting an unrealistic transfer price: a higher than market transfer price. The mechanisms that drive rack prices are more fully discussed on page 36.000 km) for overland truck transport. arises. As shown in Figure 15 (page 35).Competitiveness in the Canadian Rack Marketplace A great deal of Canadian refinery output is sold outside of the refiner’s own marketing infrastructure . who themselves do not refine petroleum products. as there is no obvious market mechanism to regulate its setting. petrochemical producers. In these cases of so-called “integrated” refiner-marketers. market-driven rack prices. most refiners also participate in the marketing and retailing of petroleum products. for example. and in the case of gasoline. but with their US and European counterparts. or transfer price. would produce better than expected refiner income. even overseas. 1 Based on Octane Magazine Retail Outlet Survey data. many US and European refineries are in practice. rack prices are also demonstrably competitive in the sense that there is historically a high degree of price uniformity between any two rack points in North America. market-driven Rack (wholesale) pricing of petroleum products. potential sources of wholesale product supply for most Canadian non-refiner marketers. Canadian refiners must therefore be price competitive not only with each other. or close to. MJ ERVIN & ASSOCIATES 11 . to major industrial consumers. The range of potential refiner sources from which a marketer can choose is largely dependent on the transportation costs involved in bringing the product from the refiner’s rack point (ie: the bulk distribution terminal) to the destination market. in order to maintain realistic accountabilities within each of the two sub-sectors. who compete for a share of this demand. With a large proportion of the Canadian population within a few hundred kilometers of the United States and/or able to receive marine supply. but at the expense of marketing income. These independent marketers naturally seek to purchase their product at the lowest available cost (rack price or a negotiated contract price).

Marketing operations within this sector can be broadly classified into three elements. Wholesale Sales to a wide variety of customers. each with its own distinct infrastructure. as detailed in Table 1: • Direct Sales to major customers who generally purchase several million litres of petroleum product annually. and who essentially deal directly with the refiner. Within this industry sector. this study focuses upon price and competitiveness factors that relate to retail gasoline marketing. and purchase at or near the established rack price. product is sold from a central facility. in the minds of many consumers. home heating.Petroleum Marketing DOWNSTREAM MARGIN EX-TAX PUMP PRICE RACK PRICE MARKETING MARGIN PRODUCT MARGIN FREIGHT The petroleum marketing sector represents the final stage of the pump price model. including mining. or in the case of cardlock facilities. Direct sales consumers do not use the infrastructure associated with the refiners’ own brand. Retail Sales to the domestic motorist. which “sets” the retail price of gasoline. and aviation. farming. as a popular and relevant “window” on the petroleum marketing sector. media and regulatory attention. trucking. this is only one (albeit an important one) of several sales channels that exist within the petroleum marketing sector. Infrastructure Although most consumers associate petroleum marketing with retail gasoline stations. gasoline price and competitiveness issues attract considerable public. the most recognized element of the downstream oil industry. It is this sector which has direct contact with the petroleum consumer and it is this sector. principally into commercial trucking operators’ vehicles. Product is either delivered to the customer by the supplier’s (or an associate of the supplier’s) tank truck. • • MJ ERVIN & ASSOCIATES 12 . For this reason.

according to the contractual relationship between the supplier and the dealer. Sales to commercial and industrial accounts by the wholesale marketing sector. by delivery tank truck.300 bulk sales outlets in Canada. Cardlock Sales of petroleum products through a network of consumer-operated fuel dispensing facilities. Primary Brand Second Brand Retail gasoline sales through the principal brand name associated with the supplier. Bulk Sales Home Heating Aviation RETAIL The remainder of this study provides a detailed examination of the retail petroleum products industry in general. often delivered by pipeline or ship/barge. in smaller centres. as principal elements of petroleum marketing operations. Sales of home heating fuels to residential furnace oil customers. usually involving some aspect of the marketing sector infrastructure. MJ ERVIN & ASSOCIATES 13 . for example.Table 1: Downstream Sales Channels Sales Channel DIRECT SALES Major Industrial Spot Rack Contract Supply WHOLESALE Infrastructure Description Sales to major accounts. Sales of petroleum products through bulk sales outlets. The name “cardlock” refers to the coded access card which the customer uses to activate the fuelling pump at the outlet. In major centres dedicated Home Heat centres provide this service. such as product transport and/or storage. These outlets usually have considerable inventory capacity. Sales to non-refiner petroleum marketers. There are over 1. using delivery tank trucks. which primarily serve long-disttance truckers and commercial delivery and haulage operators. to the aviation fuel consumer. and usually supply customers by delivery to the customer’s own storage tank. Some larger petroleum marketers also operate a network of retail outlets which are identified with a different brand than the primary. There are about 16. Sales to major industrial accounts. heating fuel delivery is an integral part of a bulk sales outlet. There are over 850 cardlock outlets in Canada. Sales of petroleum products (principally gasoline) through retail gasoline outlets. to the motorist consumer. as discussed. Direct sales generally do not involve any marketing sector infrastructure. at a negotiated contract price. Sales of aviation fuels at major and secondary airports across Canada. which is generally less than the rack price. one final element of the pump price model must be reviewed. Sales to spot buyers at posted rack price.500 retail gasoline outlets in Canada. typically at the “rack point”. and regular gasoline in particular. Before examining this sector in detail. Retail outlets are operated in a variety of modes.

6 cents per litre (Canada 1996 10-city average). As part C of this study shows. regardless of market conditions. provincial sales tax. municipal taxes.Taxation on Petroleum Products PUMP PRICE TAX EX-TAX PUMP PRICE Unlike gross product margin. this decrease is reflected in a reduced gross product margin the tax content stays essentially the same1. and seven percent GST.3 in Quebec) drop in the tax content. typically made up of: • • • • a ten cent per litre federal excise tax. tax content does fluctuate somewhat with pump price changes. or roughly 50 per cent of the pump price.2 cent (0. would include a roughly 0. If the pump price decreases for example. for example. Table 2 shows the provincial tax content for retail gasoline. which amount to 28. The petroleum industry acts as a collector of these taxes. the tax content of retail gasoline in Canada has increased steadily over several years. the tax content of the petroleum price is essentially a pre-determined. A three-cent drop in pump price. 1 Due to the application of GST (and in Quebec. PST). 1995 product taxes on retail gasoline alone represented approximately 9 billion dollars in federal and provincial government revenues. stable amount. in a small number of markets. MJ ERVIN & ASSOCIATES 14 .

5 12.9 3.0 10.3 20.0 cents is charged in the greater Victoria and Vancouver areas respectively.0 28. 1996 (City)Province BC (1) Alberta Saskatchewan Manitoba Ontario Quebec (2) New Brunswick Nova Scotia PEI Newfoundland Yukon NWT Canada Ave.0 15.5 6.8 note 1 note 2 An additional tax of 1. Provincial Tax 11.0 4.0 11.2 24.1 25.6 3.6 3.0 10.0 3.0 10.5 14.5 3.0 3.5% sales tax applied to the GST-inclusive pump price.6 25.3 10.8 4.0 10.2 24.6 22. Quebec pump taxes are reduced by varying amounts in certain remote areas and in markets within 20 kilometers of provincial or US borders.5 cents and 4.0 10.5 cents was introduced in the Montreal and surrounding area in 1996.3 27.3 Federal Excise Tax 10.0 10. An additional pump tax of 1.7 13.6 3.2 cent per litre pump tax.0 10.Table 2: Taxes on Regular Gasoline on December 31.0 GST content (7% of pump) 3.2 10.0 28.0 14. All Quebec gasoline sales are subject to a 15. MJ ERVIN & ASSOCIATES 15 .0 16.0 10. plus a 6.7 30.4 3.0 9.0 10.7 3.1 32.7 18.6 3.5 Total Tax 24.0 27.0 10.0 10.0 10.

4 ¢ 19. This 1 Prices and margins reflect a Canadian 10 city average. Pump Price/Margin Model: An Integrated View Having reviewed each of the four key pump price/margin model elements. including retail outlet distribution. operating modes. and the retail gasoline sub-sector in particular. the brand supplier’s costs.2 ¢ 24.3 ¢ CRUDE PRICE source: Natural Resources Canada • • • • Tax accounted for 28. was available for product marketing operations. and potentially. or 50. It also provides an overview of the industry in terms of several infrastructure parameters. 3.1 ¢ 5. or 9 percent. Upstream operations realized 19.3 percent of the average regular gasoline posted pump price. Figure 2: 1996 Average Prices/Margins .Part B The Structure of the Retail Petroleum Products Sub-Sector While part A of this report established a conceptual framework of Canada’s petroleum industry. MJ ERVIN & ASSOCIATES 16 . The residual.5 ¢ 0. Refiner operations realized 5.5 cents per litre (after freight cost).1 cents per litre.6 cents per litre. or 34 percent of the pump price.3 cents per litre. Figure 2 integrates the pump price model with NRCan 1996 regular gasoline product prices (10-city average). and ancillary operations.Regular Unleaded1 NOT TO SCALE PUMP PRICE 56. namely the dealer’s costs and income. this section provides a view of the Canadian petroleum marketing sector. some profit return for the shareholder. based on regular unleaded gasoline. to derive a representative value for regular gasoline gross product margin in Canada.8 ¢ TAX 28.6 ¢ EX-TAX PUMP PRICE RACK PRICE DOWNSTREAM MARGIN MARKETING MARGIN REFINER MARGIN UPSTREAM PRODUCT MARGIN FREIGHT 3.3 ¢ 28.

three key findings can be stated: Finding 4: Finding 5: In 1996. In 1996. is the second of two elements of the downstream oil industry. Freight MJ ERVIN & ASSOCIATES 17 . and is then transported to the retail outlet. Both refiner and marketing margins have been in decline over the past several years. is defined by the marketdriven price points of ex-tax pump price.gross product margin represented 6 percent of the Canadian average regular gasoline pump price. for example) is sold/transferred at the current rack or transfer price. As the product leaves the refinery plant. and is often out-sourced to third-party common carriers. Although many petroleum marketers conduct their own freight operations. In 1996. Bloomberg rack price values were used as the assumed wholesale price.5 cents per litre. This margin represents the revenue which provides for two key operations: • Freight: Freight (or distribution) is the transportation of petroleum products from the rack or refinery point to the final point of sale. and it is depicted in Figure 1 as a fixed cost element. the finished product (gasoline.3 cents per litre. which in the case of retail gasoline. the average Gross Refiner Margin available to Canadian petroleum refiners to provide for all operating costs and profits on the manufacture of regular gasoline. Finding 6: Marketing Sector Overview DOWNSTREAM MARGIN EX-TAX PUMP PRICE RACK PRICE MARKETING MARGIN PRODUCT MARGIN FREIGHT Once the refiner has completed its work. and rack price. the average Gross Product Margin available to Canadian petroleum marketers to provide for all operating costs and profits on the sale of regular gasoline in a typical urban market. The marketing sector then. In referring to marketing margins and product margins. is usually the gas station. Freight cost does not typically fluctuate. petroleum taxes accounted for 50. It is this sector which provides the entire infrastructure for bringing refined petroleum products from the refinery plant facility to the ultimate end-use consumer.3 percent of the average urban price of regular gasoline in Canada. it falls into the domain of the marketing sector. Based on the 1996 data. was 3. or “rack to retail” margin. See page 10 for further explanation. this is seen as a “non-core” business. The gross marketing margin. as part C will describe. was 5.

As represented in Figure 3.5 cents per litre in 1996. This is a particularly useful measurement in comparing retail gasoline markets. Posted pump price includes all of these variables.8¢ Pump Price) Upstream Operations 19.000 per outlet.3¢ 3. but at an average cost of over $200.costs are generally less than one-half cent per litre in most major Canadian cities. freight. Grade Differentials Most of the Canada average product prices cited in this study refer to regular unleaded gasoline (RUL). storing and dispensing a product such as gasoline adds considerably to the operating cost. which are typically close to a wholesale rack point. and is therefore a poor comparative tool. together with gas station dealers. as it excludes the “outside variables” of tax. as it represents 80% of all retail gasoline sales. Unlike most other retail enterprises however. Figure 3: 1996 Average Regular Gasoline Margins (56.3¢ source: Natural Resources Canada The determination and comparison of gross product margins in selected markets is a key objective of part D of this study. petroleum marketers. incur a variety of costs. Gross product margin is therefore defined as gross marketing margin less freight cost. typical of any retail business. but can be as high as 3 to 4 cents in markets more distant from the refinery point: this partially explains why some small. an average gross product margin for regular gasoline in a major Canadian city was 3. Modern pump and underground tank installations have greatly reduced the environmental and safety concerns associated with petroleum products.5¢ Product Operations Freight 0. Midgrade and premium grades (which have a higher octane content) represent 5% and 15% of MJ ERVIN & ASSOCIATES 18 . and upstream/refiner margins. • Product sales: Within this domain. rural markets experience higher pump prices than do larger centres.1¢ Tax 28.6¢ Refiner Operations 5.

commonly known as the “marketing mix2. competitive strategy of this type focuses heavily on selecting the best place. Higher octane grades are more expensive than RUL. one must ask how marketers compete. and 9 cents per litre for premium gasoline. Today. Specific competitiveness indicators relating to product would be: • • • introduction and promotion of gasoline grade features such as octane content. 1 Diesel is another petroleum product sold at many retail outlets. and confines itself to the more specific (and popular) issue of brand competition for retail gasoline. marketers have attempted with some success to differentiate their product offerings from other brands. Jerome McCarthy. Environmental concerns and associated costs have dictated greater selectivity in developing new sites. Basic Marketing: A Managerial Approach.. 4th Ed.44 (1st Dec. etc. A portion of the market certainly responds to this type of competitive strategy. This has resulted in a decline in the number of retail outlets in the past two decades (Figure 5. but most consumers view gasoline as a commodity. Examples of competitiveness relating to place include: • opening new or upgrading existing facilities. seasonal blends.” or four P’s: Product. The grade differential varies somewhat from city to city. p. additives. it represents a very small percentage of total retail petroleum sales. Today. Price competition has forced marketers to optimize outlet revenue. Although revenue from this product is factored into the study market economics in Part D. and accordingly. 2 E. propane vs. marketers compete for the consumer’s choice of transportation energy (for example. a number of factors preclude this type of strategy. and the price difference between these grades and the RUL price is referred to as the grade differential. marketers compete to be represented in as many and/or the best locations as possible. 1960) MJ ERVIN & ASSOCIATES 19 .). expanded product/services offerings such as convenience items. In order to measure competitiveness. gasoline). but in 1995 was typically 5 cents per litre for midgrade. page 24). Ill. Price. competitive activity can be observed when a marketer alters one or more of the variables at their disposal. (Homewood.retail gasoline sales respectively1. Irving. • Product In the past decade. will ultimately purchase based on price. Place. RUL prices are therefore most often cited when relating historical price trends.: Richard D. 1971). In the 1960’s and 1970’s this type of competitive activity was evident in the retail gasoline sector. Simply put. Competitiveness in the Retail Gasoline Sub-Sector Retail Competitive Practices and Indicators A retail gasoline marketer competes at many levels: At a general level. or when comparing price levels between markets. as gas stations proliferated. This study does not examine such a broad issue however. Prices for midgrade and premium grades are established in the same way as RUL prices: through competitive activity. and Promotion. Place Typically. rather than the most places.

Examples of promotional competition are: • • • brand identity gasoline discount coupon.contrary to some public perception. volatile prices . volatile pricing manifests itself in the form of a price war (see below). As such. free item with purchase or special price item with purchase. gasoline is viewed by consumers as a commodity uniform in quality and widely available. promotion strategies generally attempt to provide the consumer with added value without resorting to pump price reductions. and more importantly. probably due to its relatively high cost. • Price In most markets. Examples are: • prominently displayed prices . due to the largely commodity nature of petroleum product. low prices and/or margins. in fact it is indicative of some consumer perception that one brand of gasoline is essentially the same as the next. price has proven to be the most widely used competitive tool by gasoline marketers. This study therefore focuses on the nature of product price as a measure of competitiveness in the Canadian “rack to retail” sector. caused by price competition. MJ ERVIN & ASSOCIATES 20 . is less clear. Consequently. it is useful to address some of the general competitive mechanisms behind these particular competitiveness indicators. Promotional activity seems to have decreased in the past few years. their subsector margins. this study examines the dynamics of price competition in considerable detail. fluctuating pump prices are a significant indicator of robust competition among marketers. Establishing an objective measurement of price as a competitiveness indicator however. This study presents an extensive historical and comparative analysis of pump prices. Promotion In the gasoline retailing sub-sector. • • • While examples of all of these indicators are abundantly in evidence.while uniform pump prices are sometimes cited as evidence of industry collusion. price clearly remains the predominant competitive tool used by Canadian gasoline marketers. In this context. uniform prices . Price Uniformity and Volatility As the degree of price uniformity and volatility in the retail gasoline sub-sector is often perceived as synonymous with its competitiveness.• • closure of non-viable outlets. and therefore “trades” within a relatively narrow price range.that pump prices are almost universally displayed on highly visible outlet billboards is indicative of the importance of price as a key selling feature. At its extreme. and due to the already slim margins available to marketers. gasoline is a commodity.

obviously at the expense of the supplier margin. and gasoline is perhaps the only consumer product in Canada that is so consistently advertised in this way. Finding 7: Price uniformity and price volatility. Whether through falling pump prices or rising rack prices. or even undercut the competitor’s lower price. the effect on many consumers is immediate: they will drive into that station. the wholesale rack price. its effect is to restore some measure of the dealer margin. MJ ERVIN & ASSOCIATES 21 . 1 This does not occur at company operated or commission outlets. in an attempt to gain market share.When pump prices are uniform. one must adopt the perspectives of both consumers and competing. since they too must restore their gross product margins to sustainable levels. But if the pump price increase is a reasonable reflection of the underlying change in gross product margin. who then react quickly to the change. Pump prices therefore tend to move uniformly within a very short time. Price Support In times of “normal” pump prices. or when prices rise or fall apparently in unison. or even less than. facilitated through street price signs. This is a misconception. are indicators of a competitive market. and provide to the dealer what is commonly referred to as price support. If the posted price increase is too high. bypassing the higherpriced outlet. While this support may take one of several forms. the supplier may temporarily intervene. To understand the phenomenon of uniform pump prices. competitors will likely match this price. Pump price signs are an ubiquitous feature of the retail gasoline industry. for example). When this occurs. gross product margin will eventually diminish to a point that is not viable for a majority of competitors. competitors may not follow. The other dealer has little choice but to quickly match. This price lowering mechanism may sometimes result in a “price war” if each competitor continues to undercut the other. The effect of this upon the gross marketing margin is obvious: it is squeezed.where the ex-tax pump price is equal to. If one dealer decides to reduce pump prices (by two cents. There have been examples of this margin being squeezed to a point that is insufficient to cover operating costs. but to competitors. adjacent dealers. in order to maintain a reasonable market share. there are times (during a price war in particular) when the retail pump price may fall to a level that provides the dealer with an insufficient margin1 to meet operating costs. One of these competitors will be forced to make a difficult decision: to be the first to raise pump prices in order to restore gross product margins to a viable level. it is often cited as evidence that marketers engage in direct communication to “fix” prices at an agreed-to level. A common factor in both falling and rising prices is the posted price sign: it is this device that instantaneously communicates pump prices not only to consumers. since there is no “dealer margin”. the relationship between the supplier and dealer is generally as described on page 25. In the case of lessee or independent dealers however. or even being squeezed to zero . assuming that the rack price is unchanged.

Conspiracy: where several competitors act to fix prices for the purpose of reducing competition. or of direct government intervention in marketing. Perhaps the most notable of these was the 1986 Restrictive Trade Practices Commission (RPTC) study “Competition in the Canadian Petroleum Industry”. Price maintenance: where a supplier exerts upward influence on prices upon a dealer. More recently. but reverts back to the dealer when the support arrangement is ceased. The outcome of the RPTC study can generally be characterized as acknowledging that a healthy state of competition exists in this industry. Following a year-long investigation. An examination of the effect of the Competition Act. resulting in 9 convictions. the Bureau investigated four well-publicised allegations of anti-competitive behavior on the part of major oil companies in the spring and summer of 1996. Quebec has recently passed legislation which prohibits the selling of (retail) gasoline or diesel at a price which is lower than the (wholesale) cost to a retailer in any trading “zone”. In addition. Nova Scotia market may provide an example of the potential negative consequences of direct intervention. There are few current examples of direct government intervention in the pricing of petroleum products. Price Competition and the Regulatory Process All retail competitiveness in Canada comes under the purview of the Competition Act. is beyond this study’s scope. which is administered by the federal Competition Bureau (Industry Canada). the Bureau found that there was no evidence to support these allegations1. most with the general mandate of examining the “fairness” of competition and pump pricing among petroleum marketers. and a brief discussion of this case appears in part D. While this study does not intend to undertake a detailed review of the effect of the Act. Prince Edward Island is the only province which directly regulates gasoline and fuel oil prices. These cases have largely involved local dealers and/or isolated incidents. 1 Competition Bureau press release “Gasoline enquiries find no evidence of anti-competitive behavior” dated March 18. A review of historical retail pump prices in the Halifax. provincial and even municipal levels. In addition. in the past twenty-five years the Bureau has prosecuted a total of 11 violations within the Canadian retail gasoline sector. Price discrimination: where a supplier charges different prices to competitors in the same market who purchase similar volumes of products. however. The Bureau enforces provisions of the Act which prohibit: • • • • Abuse of dominant position: where a firm (or several firms in collaboration) uses its market power to lessen competition. the petroleum marketing sector has been the subject of several inquiries at federal. 1997 MJ ERVIN & ASSOCIATES 22 .Under the provisions of some price support mechanisms. control over retail pump price effectively reverts to the supplier.

one can cite examples of regulatory obstacles to exit from the retail gasoline market. creates an obstacle to. is in part. MJ ERVIN & ASSOCIATES 23 . Finding 8: Some competitiveness inhibitors may exist in the retail gasoline market which are regulatory in nature. it is the single largest one. sales of gasoline through the roughly 16. This issue is discussed more fully in part D. Many smaller retail owner-operators. Conversely. accounting for roughly 88% of all gasoline demand. that is. and at least some of this capital cost is regulatory compliance-driven. creating a need for higher margins. in the form of standards for the decommissioning of retail petroleum sites. as outlined above. policy or regulation can be deemed to be a competitive factor if it: • • • • creates an obstacle to. a competitive climate. entry into an attractive market. and consequently. So defined. The high cost of building a modern retail gasoline outlet for example. It is important to acknowledge that many regulations affecting the retail gasoline industry. or incentive for. exit from an non-viable market. promotes or limits market-driven pump prices. These regulations clearly exist to the benefit of all. a consequence of regulations which stipulate minimum standards for the design and construction of petroleum storage tanks. As a product group however.Competitiveness Factors (Drivers and Inhibitors) Competitiveness factors can be defined as those forces which act upon the industry to increase (drive) or decrease (inhibit) competitive practices. accounting for 41% of all petroleum demand. A practice. accounts for about 37% of all refined petroleum demand in Canada. it is clear that government policy plays an important role in facilitating. inhibit competition. Retail gasoline sales. and is the single largest market for gasoline products. to some degree. but exist to meet other important societal needs. particularly in smaller population centres. or inhibiting. or incentive for. may find it more attractive to continue operating a marginally viable gasoline outlet than facing the cost associated with the removal of inactive tanks and/or potentially contaminated soil. This may have the effect of reducing volume and revenue potential at other retail sites in the vicinity. higher pump prices. but the considerable investment represented by a modern retail outlet has the effect of limiting market entry to those with sufficient capital to put at risk. Retail Gasoline Demand Gasoline is but one of many products produced by the Canadian downstream industry (Figure 4). for safety and environmental protection. improves or reduces a “level playing field” in terms of the ability of one market to compete with another on the basis of price or operating costs.500 retail gasoline outlets across Canada.

Figure 5: Canadian Retail Outlet Population . This survey accounts only for major established retail networks .it has no practical means to enumerate each and every outlet.452 Million Litres source: Statistics Canada (Cat# 45-004) National Retail Petroleum Outlet Representation The most frequent source of information on the population of retail gasoline outlets in Canada is the Octane Magazine Annual Retail Survey.9% PetroChem Feedstocks 5.Figure 4: 1995 Refined Petroleum Products Demand by Product Category Naptha/Avgas/ Stove/Kero 6.1988-1995 24000 22000 Estimate of Actual Outlet Population 20000 Octane Magazine Survey 18000 16000 14000 1988 1989 1990 1991 1992 1993 1994 1995 source: Octane Magazine (estimate by MJ Ervin & Associates) MJ ERVIN & ASSOCIATES 24 .2% Propane /Butane 2. This study provides an estimate of the actual retail outlet population.7% Lube/Grease 1.2% Retail Gasoline 37.7% Light/Heavy FuelOils 14.3% Total Sales Volume: 84.6% Other Gasoline 4.2% Other 0.9% Diesel Fuel 22.2% Asphalt/Coke 4. as shown in Figure 5. nor is there any federal or uniform provincial enumeration of retail gasoline outlets.

There are two main stakeholders involved in the marketing of retail gasoline: the supplier. as one might expect. The supplier. and all inventory and revenues belong to the supplier. Distribution of these outlets by province (Figure 6. who manages the day-to-day operations at the retail outlet.The estimated number of retail outlets in Canada has declined from 22. exist between retail dealers and their suppliers. controls the setting of the pump price. The principal dealer and attendants are salaried employees of the supplier. who holds initial title to the refined petroleum as it leaves the rack point.513 723 source: Octane Magazine Retail Petroleum Outlet Modes The retail gasoline marketing infrastructure is much more complex than represented in Figure 1. Company Operated MARKETING MARGIN PRODUCT MARGIN = BRAND SUPPLIER MARGIN FREIGHT EX-TAX PUMP PRICE RACK PRICE In this mode. Figure 6: 1995 Retail Outlets by Province PE 136 Northern Canada 65 576 NF 711 657 NS NB QU 3777 1610 BC 1716 AB SK 911 MB ON 3631 Total = 14. and the dealer. and usually owns the brand name seen at the retail outlet.500 in 1995. or modes. Company Operated outlets have no MJ ERVIN & ASSOCIATES 25 .000 outlets in 1989. as owner of the product. the retail outlet is owned and operated entirely by the product supplier. using Octane counts only) is roughly equivalent to population densities. and this is of some importance with respect to the matter of prices and competition in this sector. Several possible relationships. to about 16.

the outlet facilities and petroleum inventory is owned by the supplier. the “dealer” is actually an employee of the supplier supplier supplier typically the supplier 15% Control of Pump Price Dealer Compensation Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Commission Operator MARKETING MARGIN PRODUCTCOMMISSION EXPENSE MARGIN FREIGHT EX-TAX PUMP PRICE RACK PRICE In this mode. an employee of the supplier supplier supplier typically the dealer. but the outlet operator (“dealer”) is compensated by a commission payment. who may pay the supplier a lease fee for the use of merchandising space 26% Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Lessee EX-TAX PUMP PRICE MARKETING MARGIN PRODUCTDEALER MARGIN MARGIN BRAND SUPPLIER MARGIN FREIGHT DEALER PRICE RACK PRICE In the lessee mode. the supplier retains control of the retail pump price. The lessee purchases petroleum MJ ERVIN & ASSOCIATES 26 .the entire gross product margin accrues to the brand supplier. supplier salary from supplier. who pays all outlet operating costs. The dealer in turn hires attendants. based on pump sales volume. usually based on cents per litre of petroleum sales. The “dealer” is in essence.sub-component margins . the supplier typically owns/controls the principal outlet facility which in turn is leased out to the dealer or lessee. and pays them from his commission revenue. Since the supplier owns the petroleum product at this type of outlet. Control of Pump Price Dealer Compensation supplier a commission from the supplier.

The margin between these two prices is the dealer’s gross revenue. can vary considerably from one supplier to another. Control of Pump Price Dealer Compensation lessee lessee buys product from the supplier. The dealer buys the petroleum product at a Dealer Wholesale price and in turn resells to the motorist consumer at a higher. The distribution of retail outlets by mode has some important implications concerning the nature of gasoline pricing and competition. not the supplier. who would typically charge a lease fee to the dealer for the use of the facility lessee typically the lessee. and sells at the posted pump price. dealer-established retail price.product from the supplier at a “Dealer Wholesale” price. Control of Pump Price Dealer Compensation dealer dealer buys product from the supplier. and in turn resells to the motorist consumer at a higher pump price established by the lessee. and means of compensation supplier. the retail facilities are owned by the dealer. who may pay the supplier a lease fee for the use of merchandising space 14% Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Independent Dealer EX-TAX PUMP PRICE MARKETING MARGIN PRODUCTDEALER MARGIN MARGIN BRAND SUPPLIER MARGIN FREIGHT DEALER PRICE RACK PRICE In this mode. unlike rack or pump prices. and has control over the retail pump price. This dealer margin is defined as the pump price (ex-tax). MJ ERVIN & ASSOCIATES 27 . since it is predicated on contractual arrangements between the dealer and the supplier. and sells at the posted pump price. and means of compensation dealer dealer dealer 45% Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Lessee or Independent outlets are the only modes in which a true dealer margin exists. less the Dealer (wholesale) Price charged by the brand supplier. The margin between these two prices is the dealer’s gross revenue. The dealer pays most or all of the expenses associated with operating the outlet. This Dealer Price.

1 Unless the dealer is under a price support arrangement (for instance.Figure 7 shows that of all retail outlets in Canada less than half operate as company or commission dealers. Petro-Canada. This is significant: dealers who operate as lessees or independents are directly responsible for deciding upon the retail pump price. It follows that pump prices tend to be somewhat more directly controlled (ie: at the local community level) in smaller markets than in larger markets. While a complete discussion of average throughputs in typical Canadian markets will take place in part D of this study. There is some evidence that there is a higher percentage of lessee and independent outlets in smaller markets than in large population centres. during a price war) as previously described. or Imperial Oil). In addition. Figure 7: Outlet Representation by Mode 16000 14000 12000 10000 8000 6000 4000 2000 0 Total outlets Major integrated Others 2235 3821 Company Operated Commission Dealer Lessee Independent 2022 9 2061 1059 Company Op 2226 1760 963 2298 6435 4137 source: Octane Magazine Outlet Throughput A key measure of outlet performance and viability in the downstream industry is the monthly or annual outlet throughput of petroleum products. virtually none of the major integrated outlets are company operated. This further limits the direct influence that a major oil company might have upon the Canadian retail marketplace. It therefore follows that no single oil company has a position of absolute dominance over the Canadian retail gasoline sector. Roughly half of all retail outlets in Canada represent a major integrated oil company (Shell. some general figures are mentioned here. who themselves establish pump prices. The remainder represent one of over 50 different marketer organizations. Therefore: Finding 9: Pump prices are established by the local dealer at over half of all retail outlets in Canada1. and fully two-thirds operate as lessees or independents. MJ ERVIN & ASSOCIATES 28 .

ancillary service has had the consequence of subsidizing the pump price of gasoline. Ancillary Services Very few if any retail gasoline outlets limit their product offerings simply to gasoline. In effect. Improved outlet revenue from ancillary operations has caused. more fully described in part C. who may pay the supplier (who is typically the owner of the facility) a lease or franchise fee for the use of the retail space.5 million litres. average annual throughputs ranged from under 1 million litres in smaller population centres.While an average outlet throughput may be in the order of 2. Many outlets have more than one ancillary offering: many “flagship” outlets for example. Figure 8 depicts the Canadian representation of several key ancillary services. has had a profound effect on the retail gasoline marketing sector. these study findings show that this can vary widely from market to market. These improved outlet throughputs have provided for improved petroleum revenue potential. Based on a sampling of outlets surveyed in this study. to over five million litres in major markets such as Toronto. reduced petroleum margins. feature both a large-area convenience food store and a modern car wash facility. and is a result of. In fact. Canadian throughputs have dramatically improved in the past several years . the revenue from so-called ancillary services is an increasingly essential element of retail gasoline marketing. Figure 8: Outlet Representation by Service 4000 3000 2000 1000 0 Car Wash CStore Kiosk Propane Service Bays source: Octane Magazine MJ ERVIN & ASSOCIATES 29 . which in part has led to a reduction in retail product margins. Most ancillary services are operated by the dealer/lessee.a result of significant retail outlet rationalizations (see Figure 5) which the petroleum products industry has undertaken. The proliferation over the past two decades of ancillary services such as convenience stores and car washes.

particularly around 1990. and with which the reader should be familiar. This part examines broad trends in several areas. mainly using Canada average values.Part C Historical Trend Analysis This part of the study examines several historical price and margin trends in the Canadian retail gasoline sector. An “all markets” average. Since 1 Data is not regularly collected on smaller markets. This shows that pump prices have increased in nominal terms. an examination of the specific historical record of gasoline prices is useful. Since rising prices are common to most consumer goods and services. would be somewhat higher. While some of the presented findings are selfexplanatory. in nominal (actual) and constant (inflation adjusted) dollars from 1986 to 1995. Regional and market-to-market comparisons are presented in greater detail in part D. Unless noted. the “Canada average” price reflects an average of urban markets only1. Gasoline and the Consumer Price Index A common perception among consumers is that gasoline prices are steadily rising. many utilize terms which are explained in part A. As such. MJ ERVIN & ASSOCIATES 30 . Figure 9: Annual Gasoline Price (Cents per Litre) 60¢ Nominal 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Source: NRCan 15¢ 1986 1987 1988 Including Tax Constant $ Excluding Tax Nominal Constant $ 1989 1990 1991 1992 1993 1994 1995 source: Natural Resources Canada / Statistics Canada Figure 9 shows the Canadian 10-city average regular gasoline pump price. prices are for regular unleaded (RUL) gasoline. when the Persian Gulf War caused crude prices to increase significantly. as can be seen in part D of this study. using a Canada 10city weighted (by provincial demand) average. including smaller markets.

both nominal and constant dollar prices are less in 1995 than in 1986: the constant dollar price of gasoline declined by 10 cents per litre from 1986 to 1995. It also depicts the associated margins. Figure 10: CPI Index Comparison . In constant dollars. and there appears to be no lead or lag in the timing of pump price fluctuations relative to rack price changes. nominal pump prices decreased. there appears to be little or no lead or lag in the timing of rack price fluctuations relative to crude price changes. MJ ERVIN & ASSOCIATES 31 . When pump prices are reduced by the amount of tax content. Several observations can be made from this: • • • • fluctuations in average rack prices have closely followed changes in underlying crude costs. and relative crude cost. rack price. as defined in part A of this study.Selected Goods & Services 180 170 160 150 140 130 120 110 100 90 80 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 Gulf War pushes crude oil prices upwards in 1990-91 Annual Averages. retail pump prices were about 7 cents less in 1995 than they were in 1986. 1986 = 100 Source: Statistics Canada Cat 62-010 Domestic Water Domestic Electricity Alcoholic Beverages Auto Repairs All Items Gasoline Fuel Oil Food Natural Gas Telephone Service source: Statistics Canada Key Price History Figure 11 depicts the history of Canada (10-city) monthly average regular gasoline pump prices. When compared to other consumer goods. as in Figure 10. Finding 10: Gasoline has remained at or below the “all items” Consumer Price Index nine out of the past ten years. ex-tax equivalent prices. gasoline prices have had a mitigating effect on the Consumer Price Index (commonly referred to as the CPI or inflation rate). fluctuations in average pump prices (ex-tax) have closely followed changes in underlying rack prices.1990.

Figure 12 shows that industry margins have not been constant over time. that is. then one might expect margins to be quite constant over time. Margin History While Figure 11 provides an indication of key price trends. as the next section shows. nor do rack prices exactly follow crude costs. MJ ERVIN & ASSOCIATES 32 . If. as might be suggested. as shown in Figure 12. From Figure 11 it can be seen that urban retail pump prices declined somewhat from 1991 to 1994. and the rise in the tax content. and in fact have displayed a declining trend over the past six years. the following is evident that: Finding 11: Retail pump price trends are principally a reflection of changes in the underlying rack (wholesale) price of petroleum products. which in turn. the presence of these additional market factors have operated to the benefit of consumers. it simply passes on a fixed cost margin to determine the “correct” pump price. and have risen slightly since 1994. it is also useful to examine the behavior of margins. In fact. due to additional market factors which affect pump and rack prices at any given point in time. are principally a reflection of changes in the underlying price of crude oil. the downstream industry operates on a “cost-plus” basis.Figure 11: Monthly Prices 1990-1996 (Nominal $) 70¢ Pump Price (Canada Average) 60¢ 50¢ Cents per Litre Pump Price excluding tax Tax Content 40¢ Rack Price (Canada Avg) Downstream Margin 30¢ Marketing Margin 20¢ Refiner Margin Crude Price 10¢ Jul-90 Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jul-96 source: Natural Resources Canada From these observations. as Figure 11 shows. which are defined by the price points. It is important to state that pump price changes do not occur in exact lock-step with rack prices. This recent rise in pump prices is attributable to two factors: • • the rise in crude costs in this period.

A more thorough discussion of specific market factors for these and other centres appears in part D. improved retail outlet performance as a consequence of higher throughputs due to outlet rationalizations (closures) and demand increases. which have both shown a consistent decline throughout the period 1991 to 1996. The decline in refiner and marketing margins has both resulted in. compared to the Canadian average. Finding 13: From 1991 to 1996. the gross marketing margin can fluctuate quite significantly1. since the chart is based on monthly averages.rack) Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Apr-91 Oct-91 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96 0¢ source: Natural Resources Canada Finding 12: Retail pump price increases from 1994 to 1996 are wholly attributable to increases in petroleum product taxation and crude costs. 1 In fact. not weekly or daily data. This shows that on a monthly basis. this upward trend is not attributable to “downstream” refiner or marketing sector margins. several factors. as local competitive factors act to self-regulate pump prices. while average combined Gross Refiner and Gross Marketing Margins decreased by about 7 cents per litre. the actual fluctuation is much more pronounced than shown. MJ ERVIN & ASSOCIATES 33 .crude) 5¢ Marketing Margin (retail . Regular Gasoline Downstream (Marketing + Refiner) Margin 15¢ 10¢ Refiner Margin (rack . Figure 13 is a comparison of regular gasoline gross marketing margins from 1991 to 1996 for selected centres. including: • • • improved refinery efficiency as a consequence of plant rationalization and a modest demand increase. emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs. and has been a result of. In particular.Figure 12: Monthly Margins 1991-1996 (Nominal $) 30¢ Tax Content 25¢ 20¢ Canada Avg. the average tax content of regular gasoline pump prices in major Canadian cities increased by about 5 cents per litre.

A comparison of Canadian and US regular gasoline pump prices. Figure 14: Canada / US Monthly Pump Price (Nominal $) 65¢ 60¢ 55¢ 50¢ Price per litre 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Apr-93 Oct-93 Jan-93 Jan-94 Jul-93 US Pump Price (Cdn ¢/l) Apr-94 Apr-95 Apr-96 Oct-94 Oct-95 Jan-95 Jan-96 Oct-96 Jul-94 Jul-95 Jul-96 Excluding tax Canada Pump Price US Pump Price (Cdn ¢/l) Including tax Canada Pump Price source: Natural Resources Canada MJ ERVIN & ASSOCIATES 34 . or even less than. Canadian pump prices have been roughly equal to. although Canadian pump prices in urban markets are clearly higher than in the US. US Price History The retail gasoline tax structure in Canada is vastly different than the US. On an ex-tax basis. with and without tax. this is wholly attributable to the difference in taxation. for several years. resulting in significantly higher Canadian gasoline prices. This difference accounts for most. is presented in Figure 14. if not all of the difference in pump prices between Canada and the US. US pump prices.Selected Centres 16¢ HALIFAX Canada Average 12¢ Price per litre 8¢ 4¢ 0¢ CALGARY TORONTO HALIFAX Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Apr-91 Oct-91 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96 (4¢) source: Natural Resources Canada (pump price inputs) & Bloomberg OBG (rack price inputs) Canada vs. This shows that.Figure 13: Monthly Gross Marketing Margins.

both a cause and an effect of improved throughputs and ancillary revenues as previously described. and moving up or down more or less in unison. Canadian consumers do not experience any retail gasoline pump price disadvantage to their US counterparts. largely as a result of two factors: • Canadian marketing margins have decreased in this period. there are likely some differences in the competitive dynamics in US markets compared to Canadian markets. This is no longer the case however. Figure 15 compares these values for selected Canadian and US centres over a period of several years. From this it can be seen that Canadian and US rack prices. Canadian ex-tax pump prices were historically somewhat higher than in the US. Figure 15: Monthly Rack Prices: Selected Markets 31¢ 29¢ TORONTO SEATTLE (Cdn ¢/l) 27¢ VANCOUVER WINNIPEG Price per litre 25¢ 23¢ 21¢ BUFFALO (Cdn ¢/l) 19¢ 17¢ 15¢ Jul 93 Jul 94 Jul 95 Apr 93 Apr 94 Apr 95 Jan 93 Jan 94 Jan 95 Jan 96 Oct 93 Oct 94 Oct 95 Apr 96 Jul 96 source: Bloomberg Oil Buyers’ Guide / Natural Resources Canada MJ ERVIN & ASSOCIATES Oct 96 35 . Canadian outlet throughputs (although likely still less than those of the US).Finding 14: Canadian retail gasoline pump prices are the competitive equal to those of the US. This would be a useful area for further research. when compared on an ex-tax basis. page 24) and somewhat increased demand. The introduction of Reformulated Gasolines (RFG) into some US markets has caused prices to rise. trading at any given time within a relatively narrow (about 2 cents per litre) range. which is reflected in US average pump prices. While these trends have also occurred in the US. Rack Price History The behavior of rack or wholesale prices provides an indication of the degree of competition among refiners. Prior to 1994. • Although this study shows that on an ex-tax basis. RFG has not been introduced to Canadian markets. have improved considerably. behave in a very similar fashion. as a result of outlet closures (see Figure 5.

Price History Figure 16 shows the history of Canadian gasoline demand. and as would be expected in any commodities market under these conditions.700. rising and falling closely in step with demand. but in fact across the North American continent (US demand follows a similar pattern).300.000 1.500.000 2.500. Demand vs.100. or sales. and prices tend to fall. Such a pattern is sometimes perceived as evidence of refiner or supplier “price gouging”.000 34¢ 2. any given Canadian or US rack point cannot successfully price its wholesale product substantially higher than that of any other rack market in continental North America. As non-refiner marketers attempt to secure a supply of this diminishing inventory. a “buyers market” develops. Gasoline price exhibits a similar. Gasoline demand exhibits a very regular seasonal pattern.100. per litre) 12 Month Moving Average 19¢ 29¢ 44¢ Monthly Demand ('000's litres) 39¢ source: Statistics Canada (demand) / Natural Resources Canada (price) MJ ERVIN & ASSOCIATES 36 .000 1. Pump Price (nominal ¢/litre) 3. and falling in the latter half of each year. increasing significantly every spring. To do so would invite the inevitable consequence of rack customers themselves sourcing their product needs from the rack point that offers the lowest price (plus freight expense).000 Jan-91 14¢ Jan-92 Jan-93 Jan-94 Jan-95 Ex-tax Pump Price (Canada avg. This phenomenon actually illustrates the essence of how competition in the petroleum industry operates to self-regulate the price of gasoline: The rising demand for gasoline which occurs every spring has a diminishing effect on product inventories.900. Figure 16: Monthly Demand vs.000 2.That Canadian rack prices are so closely tied to those of the US is strong evidence of the interdependence of these two macro-markets. Yet in the latter half of each year. as demand ebbs and inventory improves. Simply put.000 24¢ 1. conditions begin to favour a “seller’s market”. albeit less distinct pattern.700. compared to average ex-tax regular gasoline pump price for the same period.000 2. of motor gasolines from 1991 to 1996. or indeed anywhere.900. not only in a given market. the price tends to be bid upwards.000 2.

The traditional supply-demand model predicts that when demand rises.3%. the downstream petroleum industry. despite a rise in demand. and product taxes which add to the consumer price of gasoline. which ensures a competitive product price for buyer and seller alike. the essence of a free market economy. in that prices have fallen.Whether in the spring or the fall. and this is clearly demonstrated in the case of gasoline prices on a seasonal basis. gasoline prices have not followed the traditional model. This is of course. which consists of the refiners and marketers of gasoline and other petroleum products. MJ ERVIN & ASSOCIATES 37 . This part of the study presented a number of historical views of retail gasoline prices. All of the findings suggest that. The next part of this study will undertake a comparative perspective: examining pump price and margin differences that exist between individual markets within Canada. while world crude prices and Canadian taxes have generally increased over the past several years. while average ex-tax pump price declined by 14% (since 1994. as evidenced by declining industry margins. Finding 15: Seasonal fluctuations in retail pump prices are ultimately linked to wholesale product inventory levels. has operated in a highly competitive environment. a feature of most marketregulated commerce. price fluctuations at the rack (and consequently at the pump) are a simple reflection of buyers and sellers alike. so do prices. competing to meet their own needs. pump prices have increased due to a significant rise in crude costs in this period). demand rose approximately 8. Figure 16 shows that from 1991 to 1995. On a long-term basis however. their related product costs and margins. and it can be seen to operate as effectively in the Canadian petroleum products industry as it does in any open market.

outlet costs. which relates solely to that sector of the petroleum industry directly involved in using pump price as a competitive tool. and a more detailed examination of price. but contains two inherent limitations: • • data is drawn exclusively from major Canadian centres.Part D Selected Markets Study Introduction A review of public domain data on current and historical prices as presented in part C. outlet volumes. and pump prices alone provide very little opportunity for “comparability”. is useful in providing broad overviews of industry price and margin trends. there is no regular monitoring of pump prices in smaller centres. etc. Nineteen markets were therefore adopted for the study (Table 3). MJ ERVIN & ASSOCIATES 38 . A number of factors such as taxes. so that a broad range of the following criteria was represented: • • • • • population proximity to refinery proximity to primary supply point proximity to US border proximity to other retail markets Twenty markets were initially selected by the committee. ancillary revenues. • Methodology Selection of Markets A number of markets were selected for the study. These “outside factors” tend to obscure the more relevant aspect of pump price.. namely product margin. freight. margins and related implications for market competitiveness than can simply be provided by existing public-domain data. Part D of the study therefore has two main objectives: • an examination of a diverse array of markets in order to determine the degree of similarity or dissimilarity between them. play a role in a market’s pump price. although one was subsequently dropped due to insufficient submitted data. and in order to provide insights into the range of competitive dynamics that may exist.

confidential data were collected and independently evaluated on 481 retail gasoline outlets in 19 Canadian markets. the gross marketing margin must be examined in isolation from those other variables. Five companies responded to this request: Imperial Oil. and Group B markets less than 500.. these organizations provided market-level data on freight costs. and Quebec/Atlantic) and market size: Group A markets included population centres in excess of 500. Petro-Canada. To this end. To examine the competitiveness of the marketing.are influenced not by one. In all. Suncor Inc. Process Overview As illustrated in part A. retail pump prices . it was essential to obtain data not normally available through existing public sources. but a number of variables. price history data not available through public sources. MJ ERVIN & ASSOCIATES 39 .000.Each market was classified according to regional affiliation (BC/Prairie.0001. retail outlet and brand representation. and for smaller markets. or “rack to retail” sector. and Canadian Tire Petroleum. This study compiled both sets of financial data in order to produce a net revenue/cost per outlet picture which eliminated the effect of mode differences. Ontario. 2 Depending upon the outlet mode. Furthermore. its situation in the Greater Vancouver Regional District placed it in the category of a Group A market. member companies of the Canadian Petroleum Products Institute (CPPI) were approached to provide detailed outlet operating petroleum and ancillary revenue and cost data2 for a random sampling of outlets in each of the selected study markets. the gross marketing 1 Although White Rock is clearly not a major centre by itself. In addition. Shell Canada.and consequently competitiveness . Table 3: Selected Study Markets Total (19) Group A (8) BC/PR (9) Vancouver* Victoria White Rock Calgary* Winnipeg ON(4) Toronto Ottawa* QU/AT (6) Montreal* Group B (11) Nanton AB Peace River AB Regina* Thompson MB Sault Ste Marie* Sioux Lookout Chicoutimi* Gaspé Saint John NB* Charlottetown Halifax * forms part of ancillary revenue and cost analysis Sources of Data In order to conduct a detailed study market analysis of retail marketing operations. both the dealer and the product/brand supplier realize revenue and incur costs associated with an outlet.

tax content. average outlet annual throughput was determined for each market.margin is stripped of its freight component. average pump prices are higher than actual average regular gasoline prices. The variables of tax content. 1 Although outlet cost and ancillary revenue data was not available for all markets. including some smaller centres. rack price. Group B (smaller market) and 19-market study averages. the study postulates that outlet operating costs and revenues from ancillary sources (such as convenience store sales) might affect how the dealer establishes competitive pump prices. to arrive at “blended” values2. 1995 average values were determined for pump price. MJ ERVIN & ASSOCIATES 40 . This allows for an accurate determination of net outlet revenue. this study postulates that average outlet throughput in each market may be a significant factor affecting margins and prices. rack price. Where differences in gross product margin might still exist. and freight were successively removed from the pump price. by product grade. in addition to operating cost and ancillary revenue data gathered in the study1. From participant company supplied data. and freight. The gross product margin thus serves as an interim basis for comparing study markets. as the “blended” price includes other product grades. Values were weighted by market population using 1991 Statistics Canada census data in order to determine Group A (major urban). Gross product margins are therefore compared to corresponding volumes to determine if a cause-and-effect relationship exists. 2. these were weighted by volume. Using the derived gross product margins and volumes for each market. and the final “rationalized” gross product margin was determined for each market. 3. For each market. a broad representation of markets was possible. a market-by-market profile of outlet income is presented. 2 Accordingly. weighted by sales demand. Finally. Process Description Figure 17 shows an overview of the process used to reduce the study market 1995 pump prices into its sub-elements: Figure 17: Study Market Methodology PUMP PRICE 1 EX-TAX PUMP PRICE RACK PRICE CRUDE PRICE FREIGHT TAX OUTLET VOLUME 3 PRODUCT MARGIN 5 REFINER MARGIN UPSTREAM 2 6 7 DEALER PROFIT MARKETING COSTS MARKETING PROFIT ANCILLARY REVENUE PETROLEUM REVENUE PER OUTLET OUTLET COSTS 4 PETROLEUM REVENUE PER OUTLET CONSOLIDATED NET INCOME PER OUTLET OUTLET COSTS 1. Where applicable. to derive the 1995 average gross product margin for each of the study markets.

including relatively smaller ones such as Sioux Lookout or Gaspé. represent a broad range of markets. The derived weighted average values of pump price. and outlet operating costs were deducted from total revenue. perhaps by 1 to 2 cents per litre.4. 5.. objective data exist for both of these values. While clear. This variation is constant across all nineteen markets however. or consolidated net incomes. and from one brand to another. 7. it is important to understand that the use of rack price in this analysis has certain implications. product margins. petroleum revenues.7 million. these 19 markets represent a combined population base of 8. but they are relatively minor. also considering that RUL constitutes the majority of product. In referring to marketing margins.. These differentials do vary from one market to another. Also. Supplier Overhead costs. Wholesale refined product prices used in this study are therefore likely to be overstated. and supplier profit. encompassing a significant portion of the entire Canadian market. grade differentials were based on known differentials of nearby markets. and therefore where assumptions were made. freight. marketing margin. a recognized source of data on world crude oil and petroleum markets and prices.. accurate comparisons are possible. the effect on the “blended price” is small. as described on page 10. and accordingly represent a broad spectrum of consumers and marketers. Interpretation of Data In some smaller centres.. This value was then applied to the gross product margin to determine average outlet petroleum revenue. many wholesale petroleum purchases are made at less than the “posted” rack price. Use of Rack Price The derived value of retail gross product margin is essentially based upon two price points: pump price and rack price. From participant company data. Since actual wholesale prices (using transfer or contract prices) are not available in the public domain. 6. Bloomberg rack price values were used as the assumed wholesale price. average revenues from ancillary services were added. Unlike retail pump prices however. the Bloomberg rack price is used as the defining wholesale price point which differentiates between the refiner and marketing sectors. When these margins are applied to outlet throughputs as in step 4 above. etc. and gross product margins are therefore likely to be understated.to determine average consolidated net revenue per outlet. The resultant consolidated net revenue per outlet was examined in terms of its component elements of Dealer Income. . Rack prices used in this study are taken from Bloomberg Oil Buyers’ Guide™. A dollar-per-outlet estimate of these elements was made. so that on a cents-per-litre basis. MJ ERVIN & ASSOCIATES 41 . the rack price basis results in petroleum revenues which are understated to a somewhat greater degree in high throughput markets than they are in low throughput markets..

The study data suggests that variations in tax rates account for a significant part of pump price differences. and these tend to interfere with an objective comparison of fundamental competitive differences which may exist.38 cents per litre in ex-tax pump price. accurate.8 cent difference in pump price 1 See footnote at Appendix II. there is little to suggest why such a high variance exists. MJ ERVIN & ASSOCIATES 42 . Figure 18: 1995 Average "Blended" Pump Price 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ Price per Litre 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River On the basis of posted pump prices. but a variance of only 12.64 cents per litre in pump price. A 6. Tax Figure 19 shows posted pump prices for the study markets. The first of these variables to be examined is tax. and based on objective. independently gathered data. table J for an explanation of how variance is derived. Several variables beyond the control of the retail gasoline sector are incorporated into the pump price however. broken into tax and extax components. while lower prices tended to prevail in major centres.Rack prices used in this study are nevertheless market-driven. Study Market Findings Posted Pump Price Figure 18 shows 1995 average retail pump price (using a “blend” of gasoline and diesel grades) for each of the 19 study markets. The data shows a statistical pump price variance of over 17 cents per litre within this study group. The 19-market study group exhibited a statistical variance1 of 17. The data also shows that typically. higher priced markets are associated with smaller population centres.

namely the upstream industry and refiner sector. was less than three cents. This eliminates any effect that tax variability may have. In all study markets. Montreal).between Calgary and Vancouver for example. ex-tax elements 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ Cents per litre 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River 95 Blended Tax 95 Blended Extax Price Finding 16: Provincial differences in product taxation are a predominant cause of inter-regional pump price differences.while all markets are subject to the same rate of federal excise tax and GST1. it is therefore more useful to use ex-tax pump prices when comparing any two markets.75 cents per litre (Vancouver.less than one-half cent per litre. Since the level of taxation is clearly a factor which is beyond the control of the petroleum industry. while taxation between provinces is more pronounced . MJ ERVIN & ASSOCIATES 43 . GST content can vary by market. As this study seeks to isolate the marketing or “rack to retail” sector as a competitive entity. or when examining historical price trends.tax. thus providing a better basis for comparison. Figure 19: Pump Price . as described in part A. Upstream and Gross Refiner Margins Although the deduction of tax content is useful. Average 1995 taxation within the study group ranged from 22 cents per litre (Nanton) to 28. accounting for roughly half of the average retail price. the resultant ex-tax pump price nevertheless represents a gross margin for the entire oil industry. but the variance is minimal . provincial tax rates can vary greatly. 1 Due to pump price differences. when examined on an ex-tax basis. additional elements of the revenue stream must be further isolated. The data shows that taxation between markets within the same province varies little. taxes were a significant element of pump price.

as this would cause rack buyers to bring product in from the lower-priced region . as is examined below. This is due to the fact that for any market. rack and pump prices. rack price) and gross marketing margin elements. but ultimately. in the case of Thompson). Figure 20 shows ex-tax pump price isolated into its upstream/refiner (ie. Furthermore. the rack price is set at the rack point (Winnipeg.Since the refiner’s rack price incorporates the raw material cost (crude price) plus the “value-added” element of refining. one region cannot maintain rack prices at a higher level than another.assuming transport costs did not outweigh the price difference. Figure 20: Ex-Tax Pump Price Elements 40¢ 95 Retail Marketing Margin 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River 95 Blended Rack Price As many petroleum marketers are also involved in crude oil production and product refining. It can also be seen that upstream/refiner margins for remotely located markets such as Thompson MB. MJ ERVIN & ASSOCIATES Cents per litre 44 . and their respective margins. To address this. When rack price is deducted from the ex-tax pump price. the resultant gross marketing margin represents that portion of the pump price model which relates solely to the retail marketing sector. the rack price is equivalent to the upstream margin plus the refiner’s margin. if a clear understanding is to be achieved. differ little from those of major centres. reflecting some differences in refinery crude acquisition costs. Freight costs are additional. the validity of analyzing gross marketing margins in isolation might be raised. the dynamics of (marketing) retail pump prices are quite distinct from those of (refiner) rack prices. and therefore are best analyzed separately. reflecting the reality that at the rack level of competition. it should be restated that each of these sectors. are clearly delineated by market-driven crude. The figure shows that combined gross Refiner/upstream margins are relatively uniform among the study group.

Before using this as an analytical tool however. It is axiomatic that remote markets incur higher freight costs than those located close to the source of supply. one final outside variable must be isolated: that of product freight. the data shows that freight is often a significant part of the gross marketing margin. particularly in comparisons of major urban markets to small. as low as 0. this freight cost is almost negligible.3 cents per litre. it is essentially a “non-core” business.16 cents per litre (gross marketing margin) to 7. remote population centres. Figure 21: Gross Marketing Margin Elements 20¢ 15¢ Freight Cost 95 Retail Product Margin 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River Elimination of the freight variable reduced the study group’s statistical variance from 13. To provide a comparative view of the marketing dynamics within the study group. in fact. Figure 21 shows a study market comparison of gross marketing margins. with their component freight costs. For other. generally smaller markets. and therefore a significant pump price factor. Finding 17: Market-specific differences in product freight are a key factor in inter-market ex-tax pump price differences. Two of the study markets had freight costs in excess of 3.49 cents per litre (gross product margin).0 cents per litre. most Canadian marketers contract out at least some of its product distribution needs to third party cartage companies.Gross Marketing Margin and Freight Cost The gross marketing margin provides for a useful comparison of revenue streams available to the retail gasoline marketing sector. resulting in comparative gross product margins. MJ ERVIN & ASSOCIATES 45 . For markets which are also established as rack points. it is therefore important to eliminate the freight variable from the gross marketing margin. Although freight operations are often an integral part of many petroleum marketing operations.

at 3.22 cents per litre Smaller markets showed a wider variance in gross product margin .6 cents) to the variance in their component gross product margins (7.42 cents per litre.6. whereas the study market result cited here incorporates all gasoline grades and a broad variety of population centres.17 cents per litre. it is evident that the non-industry factors of taxation and freight cost are partly responsible for pump price differences between any two markets. or between any two regions. or consolidated net incomes. petroleum revenues. For all study markets. In referring to marketing margins.the gross revenue available to the petroleum marketing sector for its operations.Retail Gross Product Margin Figure 22 provides a comparison of the original pump price for each study market. The study revealed that: • • Retail gross product margins differ very little between major urban markets . at 14. Gaspé. product margins. Figure 22: Petroleum Gross Product Margins 70¢ 60¢ 95 Retail Product Margin 95 Blended Pump Price 50¢ 40¢ 30¢ 20¢ 10¢ 0¢ Victoria Vancouver White Rock Winnipeg Calgary Nanton Regina Toronto Ottawa Sioux Lookout Chicoutimi Saint John Thompson Peace River Montreal Halifax Gaspé Sault Ste Marie Charlottetown When comparing the variance in pump prices within the 19-market study group (17. was the lowest. A 7.68 cents per litre. 1995 gross product margin averaged 5.95 cents per litre.a variance of only 2. was the highest of the study group. MJ ERVIN & ASSOCIATES 46 . to the resultant retail gross product margin .5 cent variance in gross product margin is still significant however. Group A (larger population) markets averaged 5. as the 3. which suggests that there may be an additional factor which is responsible for pump price 1 This is considerably more than the 3.5 cents per litre average Gross Product Margin cited in Part B. while Toronto.5 cents).68 cents per litre1. while Group B markets averaged 7.5 cent per litre average relates to regular gasoline in major markets. Bloomberg rack price values were used as the assumed wholesale price.06 cents per litre.

000 1.differences between markets.000. for example. vs.000. Figure 23: Average Annual Throughput per Outlet 6.000. once isolating retail gross product margin from all of the “outside” pump price factors. This study’s data shows that the range of volume performance among outlets within a given market is relatively narrow.000 4. A wide range of volume performance is evident.000 litres per year (Toronto).000 2. sold significantly less than 5 million litres of petroleum per year.1 cents per litre in Toronto. a distinct relationship between product margin and outlet throughput emerges: MJ ERVIN & ASSOCIATES 47 . To understand why such a wide range of margins can exist after eliminating all tax and freight variables. 3.14.000 5. If these two factors are related to each other as they are in Figure 24.000.000 Litres 3.000.000 0 Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River Relationship of Gross Product Margin to Outlet Throughput Figure 22 shows that.000. Indeed. it would likely be so unprofitable as to be un-viable. Figure 23 shows a similarly wide range of variability in average throughput per retail outlet within these same markets.000 litres per year (Sioux Lookout) to over 5.000. ranging from under 700.2 cents per litre in Gaspé. a wide range of variability still exists between markets in the study group . an examination of related outlet throughput volumes is necessary. if any retail gasoline outlet located in the Toronto area for example. Outlet Throughput Figure 23 shows average annual outlet throughput (sales volume) for the study group.

It can be seen from Figure 25 that major centres (Group A) generally experience smaller retail gross product margins (5. all market groups (BC/Prairie. Although MJ ERVIN & ASSOCIATES 48 .000 3.6634Ln(x) + 76. not of poor competition.7 million respectively. an outlet with low throughput would derive less petroleum revenue than a high-volume outlet. Smaller markets perform as competitively as larger centres.000 Volume (litres) 4. Ontario.000 5. compared to 2. Regionally. while those with high Gross Product Margins tend to have low outlet throughputs.4 million litres annually. As most outlet operating cost are fixed in nature .000. Gross Product Margin 18¢ Peace River Thompson Chicoutimi Saint John Charlottetown Victoria Vancouver White Rock Calgary Regina Winnipeg Ottawa Sault Ste Marie 16¢ 14¢ 12¢ Gaspé Sioux Lookout 10¢ 8¢ 6¢ Nanton 4¢ Toronto 2¢ y = -4. it follows that higher gross product margins will be the consequence. On average however.000. and Quebec/Atlantic) exhibit a close adherence to expected margins based on throughput. the Group A market outlets had roughly 50% more throughput than Group B outlets . This analysis of outlet throughput and gross product margin by market leads to one of the more significant findings of the study: Finding 18: After accounting for differences in taxation and freight the remaining difference in retail pump prices between markets is very closely linked to market differences in average sales volumes such that markets with low Gross Product Margins are associated with high outlet throughput volumes.42 cents) than smaller (Group B) population centres (7.000 Halifax Montreal 0¢ That such a relationship would exist is understandable: with the same margin. If all outlets in a given market experience generally low throughputs. they remain essentially the same regardless of volume changes .that is. With few exceptions.000.000.962 R2 = 0.000 6.000.95 cents).6624 1. and the higher prices (and margins) generally seen in these markets were a function of poor volume performance.000.000 2. the 19 study markets exhibit a high degree of uniformity of gross product margin as a function of outlet throughput.Figure 24: Outlet Volume vs.a low volume outlet would be much less profitable than one in the same market with significantly higher volumes.

Figure 26 summarizes total outlet petroleum sales. while operating costs are those costs which are directly incurred in the operation of the retail facility. less outlet costs.000 6. and incur many expenses in the course of their commerce. and ultimately shows that very little difference in competitiveness exists between any two markets. this is likely due to the higher incidence of Group B study markets within this region.Quebec/Atlantic markets appear to experience higher margins (and smaller throughputs) than other regions.716 .000. It represents the residual revenue which is available to the dealer and to the supplier. such as convenience stores. ancillary sales.000. Gross product margin.000 Volume (litres) The examination of gross product margin as a function of outlet throughput provides a comprehensive and objective rationalization of inter-market pump price differences. car wash. Ancillary revenues are those derived from non-petroleum sales sources.000. Consolidated net revenue is the result of combining gross petroleum revenue (gross product margin times throughput) plus ancillary revenue (excluding cost of merchandise). and auto service. and supplier MJ ERVIN & ASSOCIATES 49 . supplement their incomes with other revenues. and must be examined.000.Regional & Urban Groupings 18¢ 16¢ 14¢ 12¢ 10¢ 8¢ Group B markets QU/AT markets BC/PR markets Group A markets Ontario markets All study markets 6¢ 4¢ 2¢ 0¢ 1. in addition to petroleum sales. and the resultant consolidated net revenue.000 2. product cost. outlet-based view of retail markets. These additional factors clearly have an effect on the relative competitiveness of retail markets. however. competitiveness occurs between retail outlets. Consolidated Net Revenue per Outlet To create a complete. In reality.000 5.000 4. Figure 25: Outlet / Volume Relationship . supplier overhead costs. which.000.000. which for the study group. two additional factors are introduced: ancillary revenue and outlet operating costs.the revenue available for dealer income. is only a measure of petroleum revenue per litre. as described below.000 3. averaged $69.

Most markets showed relatively similar net revenues (see Appendix II.000 $100.000) 1: Net Retail Petroleum Revenue 2: Ancillary Revenue 3: Outlet Costs 4: 95 Consolidated Retail Outlet Income The findings depict that some inter-regional differences in outlet net revenue exist.000 per year respectively .000) $(200. An examination of these component elements reveals a significant finding: that for most markets.$154.000) $(350. petroleum sales revenues alone were insufficient to cover operating costs for the 481 individual outlets studied. reduced pump prices. Finding 19: Based on published rack prices. petroleum revenues alone are insufficient to offset the operating expenses associated with retail petroleum outlets. these ancillary operations contributed to a lower product margin and consequently. MJ ERVIN & ASSOCIATES 50 .000 $($80) ON QU/AT Group A Group B All Study Mkts $(50.000) $(250.Group B outlets were not as profitable as these revenue values might suggest.000) $(300. $60. Although outlets in smaller (Group B) markets had higher outlet consolidated net revenues than major market outlets . Dealer and Supplier Profitability Consolidated net revenue represents the source of cash flow for three distinct purposes: • dealer income/profit: the return or salary to the dealer.profits. although these differences are somewhat overstated (market data for Montreal showed particularly low net revenue. Costs. As described above.000 $50. Table K). which reflects his investment in the outlet. In effect. causing the weighted average for Quebec / Atlantic to be depressed). Income BC/PR $300. Figure 26: Outlet Revenues.000) $(100.000 $200. and his personal labour investment. The study average retail gasoline outlet would have experienced a net loss without the contribution of ancillary operations.000) $(150.000 $250. as explained below.000 $150.000 vs. consolidated net revenue is the residual revenue which is available to the dealer and to the supplier. A discussion of the ultimate distribution of this revenue is useful.

supplier overhead: all operating costs of the supplier that are not directly associated with a single outlet. These costs would include salaries of marketing representatives and management, brand advertising, corporate charity, sales processing, head office and regional office overheads, etc.. supplier profit: after the above costs are allocated, the residual revenue is available as profit to be re-invested into retail operations, and/or distributed to shareholders.

Although ideally, this study would quantify each of these values, there are no clear, objective means to do so. In particular, the measurement and subsequent allocation of supplier overhead costs on an outlet-by-outlet basis is an inexact science, at best. This study therefore provides an estimate of these values, as shown in Table 4.

Table 4: Estimated Cash Flow from Consolidated Net Revenue
All Study Market Avg. Consolidated Revenue (data supported) comprised of (estimated): Dealer Income Supplier non-outlet Overhead Supplier Residual Profit $32,000 $52,000 $(14,000) 0 to $60,000 $30,000 to $70,000 $(30,000) to $150,000 $70,000 Estimated Range ($15,000) to $220,000

note Supplier overhead estimates are based on MJ Ervin & Associates research data not directly related to this study.

Despite the fact that these table values are estimates, the values, and the supplier residual profits in particular, are believed to be a reasonable assessment of the state of retail profitability in Canadian retail petroleum markets. Accordingly, in 1995, a typical retail outlet is estimated to have returned a net loss to the supplier in the order of $14,000, using Bloomberg rack prices as the cost basis. Finding 20: For the 481 individual outlets studied, after the average 1995 outlet revenues were distributed to meet dealer income and the supplier’s marketing overhead requirements, the residual represented a net loss to the supplier. Taking into account the possible discounts from posted rack prices and independent brands’ lower marketing overheads, residuals for outlets not studied may be better. This may contradict other indications that 1995 in fact may have represented a profitable year for Canada’s major oil companies. This was unlikely to be as a result of retail marketing operations, however, and was more likely a result of other operations including upstream, refining, or petrochemicals. Also, non-refiner marketers, who did not contribute to the study database, may have realized somewhat better profitabilities than indicated here: it is likely that their dealer costs and supplier overheads are less than those of major oil companies. Nevertheless, this data illustrates an important finding:

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Finding 21: Based on published rack prices and the individual outlet data, the profitability of the 481 outlets studied appears only marginal. The viability of the Canadian retail gasoline sector as a whole may be somewhat better, given the possibility of discounts from posted rack prices and potentially lower overhead costs. Unlike the major market outlets, rural market outlets used in this study appeared to be somewhat more profitable. This may not be representative of rural outlets in general, however, since the 11 Group B markets were chosen for this study for some particular criteria, not necessarily to be “typical” small-population markets.

Market by Market Competitive Analysis
This section of the study provides a detailed market-by-market analysis of the 19 study markets for the purpose of illustrating some competitive dynamics that may exist in retail gasoline markets.

Explanation of Format
Each market commentary begins with a demographic overview as shown below, providing values and rankings for a number of parameters: • • • • • population - taken from 1991 census data, this is the population of the greater metropolitan area (census district) of each municipality. # of brands - number of brands, as reported by study participants. # of outlets - estimated number of outlets, as reported by study participants. outlets per 10,000 - number of retail outlets per 10,000 population. avg outlet volume/yr - average outlet annual throughput, based on participantprovided outlet data. Total market volume and total outlets were not used to derive this measure, as they are estimates only. 95 mktg mrgn - gross marketing margin, as defined in part A of this study. freight - freight cost per litre associated with transporting petroleum from the rack point to a typical outlet in the market. 95 prod mrgn - gross product margin, as defined in part A of this study. rank or rank* - ranking of the value within the range of study group values. Where an asterisk appears (*), rankings are lowest value = 1, otherwise highest value = 1. sample size - the number of retail outlets for which data was collected in this market.

• • • •

Where sufficient data exists, a historical record of relevant prices is shown in graphical form.

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Victoria
population # of brands # of outlets outlets per 10,000 299,550 12 106 3.54 rank 8 rank 9 rank 8 rank* 6 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3,223,068 litres 6.89 ¢ 0.41 ¢ 6.48 ¢ rank 9 rank* 7 rank* 10 rank* 7

sample size 26

General: Victoria is a relatively major market, and its location on Vancouver Island presents some uniqueness with respect to supply. Geographic / Supply / Freight cost considerations: As Vancouver Island has no refinery, Victoria depends upon marine supply from the Vancouver mainland, or potentially from any marine source of supply in the Pacific Rim. This broad access to supply has occasionally allowed some marketers to purchase “spot” gasoline at relatively low rack prices, creating a short-term drop in pump prices. In the past several years, the rack market across Canada has grown more robust, such that all Canadian rack prices now follow those in the US very closely, and most Canadian markets now benefit from the same type of cross-border rack competition that Victoria had experienced. Influence of other markets: Due to its geography, consumers in this market are somewhat “captive” to the local retail gasoline marketers: no opportunity exists to drive to other markets to purchase retail gasoline on a casual basis. This had no apparent effect on the level of competition or price levels however, as described below. Price history / Taxation: Pump prices have historically been quite volatile, often at times when other markets have been quite stable, as described above. Victoria collects a 1.5 cents per litre municipal tax. Ex-tax pump prices are on average, very close to the Canadian 10city average. Margin/Throughput relationship (Figure 24): Victoria fell within a cluster of markets with similar margin/throughput relationships. Product margin was marginally less than expected for a market with these throughput characteristics. Consolidated net revenue: No ancillary or outlet cost data was available.

Figure 27: Victoria - Price History
60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢
Crude Oil Price Vancouver Rack Price Victoria Posted Price - ex tax Canada Average - extax Victoria Posted Pump Price RUL Canadian Average Posted Pump Price

10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Jan-92 Jan-93 Jan-94 Jan-95 Oct-95 Jan-96 Jul-92 Jul-93 Jul-94 Jul-95

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ranking 11th. a 60. Influence of other markets: Although relatively close to the US border.38 ¢ 7. but well within a cluster of markets with similar throughputs. Overall. Margin/Throughput relationship (Figure 24): Gross product margin was slightly high.Price History 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Apr-93 Apr-94 Apr-95 Apr-96 Oct-92 Oct-93 Oct-94 Oct-95 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Vancouver Rack Price Vancouver Posted Price . net outlet revenues were less than those of other major centres. Vancouver provides several perspectives into retail marketing. and also has local refining capacity.60 ¢ rank 4 rank* 9 rank* 9 rank* 11 sample size 37 General: As one of Canada’s major retail markets. Consolidated net revenue: Vancouver outlets averaged the highest in both ancillary revenue and outlet operating costs. while average throughput ranked 4th.Vancouver population # of brands # of outlets outlets per 10. Low consolidated net revenues may have contributed to the higher margin. Price history / Taxation: Pump and ex-tax prices have historically been somewhat higher than the Canadian 10-city average. contributing to a higher than average pump price.ex tax Canada Average . as described below. driving distances preclude most Vancouver consumers from routinely accessing this neighboring market.extax Canadian Average Posted Pump Price Vancouver Posted Pump Price RUL MJ ERVIN & ASSOCIATES 54 . Figure 28: Vancouver .968 litres 7.658.000 barrel per day plant located in the greater Vancouver area. This may explain the somewhat elevated gross product margin in this market.000 1. and with access to wholesale product by several means.89 rank 3 rank 5 rank 3 rank* 2 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3.745 18 446 2. Vancouver is also a terminal for a refined products pipeline from Edmonton.98 ¢ 0.542. The somewhat high margin placed this market slightly above. this market has access to numerous refiners along the Pacific coast through marine supply. Geographic / Supply / Freight cost considerations: As a port city. Vancouver collects a 4 cent per litre municipal tax.

Price history / Taxation: Although no specific data is available. Margin/Throughput relationship (Figure 24): gross product margin was virtually identical to that of Vancouver.53 ¢ rank 5 rank* 9 rank* 12 rank* 10 sample size 5 General: White Rock is situated on the lower mainland of BC. Despite its relatively small size. the White Rock retail gasoline market displayed the same attributes as a major urban market. thus providing some unique characteristics for the market study. prices in this market have historically mirrored those of Vancouver.315 4 8 4. this market is subject to a 4 cent per litre municipal tax. In all respects. Freight costs were accordingly low compared to other small markets in this study. This market is close to its usual rack point. price/competitive dynamics appeared to relate more to the influence of Vancouver than to any cross-border factors.White Rock population # of brands # of outlets outlets per 10. Geographic / Supply / Freight cost considerations:.000 16. Consolidated net revenue: No Ancillary or outlet cost data was available for this market. White Rock’s margin was typical of markets with similar outlet throughputs. White Rock is essentially part of a major market due to its proximity to Vancouver. Like Vancouver. Vancouver.98 ¢ 0. and retail gross product margin was less than that of markets with a similar population base. or competitive dynamics. The reality may be that the immediate necessity of filling one’s gas tank may often preclude a cross-border trip. This is likely due to the fact that unlike many smaller markets. Average outlet throughputs were relatively high. the study data found little to suggest a material effect upon representation. prices. gasoline “cross-border shopping” is less pronounced than might be expected.45 ¢ 7. adjacent to the United States border.630 litres 7.90 rank 14 rank 17 rank 14 rank* 13 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. at least in this market. MJ ERVIN & ASSOCIATES 55 .604. due to its proximity to one. Influence of other markets: Although this market is a border-crossing community. but less than most markets with a small population base. This suggests that.

Price history / Taxation: As the figure below shows. Figure 29: Calgary .675 27 313 4. on some occasions the Calgary ex-tax RUL pump price has dropped to within one cent per litre of rack price.827. Margin/Throughput relationship (Figure 24): Gross product margin was very typical of other study markets with similar throughput characteristics.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Calgary Rack Price Calgary Posted Price . Calgary pump prices are very close to the Canadian average.47 ¢ 0. creating some competitive pressures (see Nanton). Consolidated net revenue: was typical of other major markets in the study group. Rack-to-outlet freight costs are among the lowest in the study group. which was one reason for selecting Calgary as a study market. Calgary is of sufficient size to support a viable rack market.719 litres 6. Indeed.extax Calgary Posted Pump Price RUL Canadian Average Posted Pump Price MJ ERVIN & ASSOCIATES 56 . Geographic / Supply / Freight cost considerations: Although there is no refining capability within this market. Other considerations: Of the markets studied.ex tax Canada Average . Some smaller markets in the vicinity have occasionally priced below Calgary. Calgary had the third highest number of retail brands. pump prices in this market have historically been well below the Canadian 10-city average. Product is usually sourced from Edmonton refineries via pipeline.Calgary population # of brands # of outlets outlets per 10. This trend is largely due to a low provincial tax rate: when compared on an ex-tax basis.23 ¢ rank 3 rank* 6 rank* 3 rank* 6 sample size 69 General: Alberta enjoys the lowest provincial product tax rates in Canada.000 710. Influence of other markets: Calgary is fairly remote from US and other major markets.4 rank 4 rank 3 rank 4 rank* 9 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. indicative of a strong competitive climate.24 ¢ 6.

Since 1993. Ex-tax prices are also above average. supply/demand is likely more balanced.Regina population # of brands # of outlets outlets per 10. Although no supporting data is available.089.ex tax Canada Average . Price history / Taxation: In the early 1990’s this market experienced frequent and pronounced price war activity.794 litres 7. margins and throughputs were typical of other markets with a similar population base.extax Canadian Average Posted Pump Price 10¢ 5¢ Apr-92 Apr-93 Apr-94 Apr-95 Apr-96 Oct-92 Oct-93 Oct-94 Oct-95 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 MJ ERVIN & ASSOCIATES 57 . reflecting a somewhat higher than average gross product margin relative to the 10-city weighted average.50 ¢ 0. Regina was of some interest as a study market. Consolidated net revenue: was typical of other similar markets.21 ¢ 7.Price History 65¢ Regina Posted Pump Price RUL 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ Crude Oil Price Regina Rack Price Regina Posted Price . Margin/Throughput relationship (Figure 24): Although gross product margin was high relative to major markets. Figure 30: Regina .180 15 86 4. and this market is now more typical of other large population centres. Freight costs were therefore low: Regina ranked first (least) in freight costs among the entire study group. it is likely that this reflected a surplus of wholesale inventory within the local market or region.29 ¢ rank 10 rank* 8 rank* 1 rank* 8 sample size 30 General: With local refining capacity. price volatility has eased. which are among the highest in Canada.80 rank 9 rank 7 rank 10 rank* 10 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. and is therefore a recognized rack pricing point. this market has generally exhibited pump prices which are somewhat higher than the Canada 10-city average. this market is removed from other significant markets. and therefore experiences no particular influences from any other major market. Since then.000 179. Geographic / Supply / Freight cost considerations: Regina possesses its own refining capacity. and a history of volatile pump prices. This is partly due to provincial taxation levels. Influence of other markets: Like Calgary.

and therefore experiences no particular influences from any other major market.extax Canadian Average Posted Pump Price MJ ERVIN & ASSOCIATES 58 .Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Winnipeg Rack Price Winnipeg Posted Pump Price RUL Winnipeg Posted Price . this market has exhibited relatively stable pricing. although. it is an established rack price point.217 litres 8.84 ¢ rank 8 rank* 11 rank* 2 rank* 12 sample size 61 General: The Winnipeg market is characterized by stable. like most markets of this population density. Price history / Taxation: In the early 1990’s this market experienced some price war activity.ex tax Canada Average .23 rank 6 rank 6 rank 5 rank* 8 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. though somewhat higher than average ex-tax pump prices.Winnipeg population # of brands # of outlets outlets per 10. Influence of other markets: Like Calgary.790 17 261 4. although there is no study data to support this. possibly due to modest ancillary revenue. Geographic / Supply / Freight cost considerations: No refining capacity exists within the Winnipeg market. Figure 31: Winnipeg . This may reflect a lower than average Consolidated Net Income. and has remained very close to the Canadian 10-city average. this market is removed from other significant markets.22 ¢ 7.06 ¢ 0. prices have tended to stay somewhat above the Canadian average. Since then.000 616. On an ex-tax basis.265. probably related to a regional surplus of wholesale inventory (see Regina). Consolidated net revenue: No ancillary or outlet cost data was available for this market. Margin/Throughput relationship (Figure 24): Winnipeg fell within a cluster of markets exhibiting similar margins relative to their throughputs.

would have an offsetting effect. Geographic / Supply / Freight cost considerations: Located within an hour’s drive of the Calgary rack. Its setting on a major highway provides a significant opportunity for attracting highway motorist volume. this market has a relatively low freight overhead. it is likely that low operating costs. Margin/Throughput relationship (Figure 24): Like some other small markets in the study group.51 ¢ rank 15 rank* 3 rank* 10 rank* 3 sample size 2 General: Nanton is a farming community approximately 70 km south of Calgary. a feature not available to other. due to its proximity to one. While the margin data might suggest that retail gasoline operations in Nanton would not be profitable.the highest of the entire group . as Figure 24 shows. MJ ERVIN & ASSOCIATES 59 .000 1.000 litres 5. Nanton had the second lowest gross product margin of the study group. Despite its small size. in order to maintain a share of the considerable potential sales revenue that passes through this market.071. the Nanton retail gasoline market displayed the same price attributes as a major urban market. In this respect. in terms of expected petroleum revenues. situated on a major North-South highway to the United States Among the study group. Alberta population # of brands # of outlets outlets per 10. Average outlet throughputs were relatively low. Some unique characteristics of this market serve to illustrate why some smaller markets experience relatively low pump prices. Nanton had a high number of per capita outlets . Unlike many of the smaller markets in this study group. Nanton was perhaps the least viable market in the study group. Nanton was the smallest market in terms of population.Nanton. This strategy has had the effect of sustaining a roughly 10 million litre per year retail gasoline market . While these conditions would normally result in a high gross product margin. while others experience consistently high prices.91 ¢ 0.far in excess of what would be expected of a community with a population of 1. Consolidated net revenue: No Ancillary or cost data was available. Due to its highway location and its proximity to Calgary. Nanton appeared to benchmark its pump prices to those of Calgary. the retail gasoline market in Nanton was not restricted to the local population.600. placing Nanton well below the expected margin.41 ¢ 5. and perhaps healthy ancillary sales associated with highway traffic. although not as low as expected.585 4 5 31. Price history / Taxation: In order to attract market share beyond simply the local population. Influence of other markets:.and a low average outlet throughput.55 rank 19 rank 17 rank 18 rank* 19 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. more isolated small-town markets. Nanton has traditionally priced either at or below Calgary.

MJ ERVIN & ASSOCIATES 60 . Influence of other markets: Since it is not located on a major inter-urban thoroughfare.157. though fairly typical of many smaller. further adding to overall high pump prices.6 ¢ 10.000 6. Price history / Taxation: Peace River is typical of small. nor is it influenced by. Geographic / Supply / Freight cost considerations: At 1. its normal rack point. Peace River has among the highest freight cost in the study group.715 6 8 11. Alberta population # of brands # of outlets outlets per 10. Peace River also experiences high freight costs. and was accordingly chosen as a study market. this market has little or no influence upon.45 ¢ 1. other markets.Peace River. they were comparable to other markets with similar average throughputs. and due to its isolated locale in northern Alberta. the community of Peace River is subjected to a number of factors which give rise to higher than average prices.623 litres 12.6 cents per litre. In contrast to Nanton.85 ¢ rank 13 rank* 16 rank* 16 rank* 15 sample size 4 General: Peace River is located at a considerable distance from the nearest source of primary supply. Margin/Throughput relationship (Figure 24): Although gross product margins in this market were relatively high. isolated markets.91 rank 17 rank 13 rank 14 rank* 17 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. experiencing relatively high gross product margin and consequently. Supply is via tanker truck from Edmonton. high pump prices. isolated markets. and in fact fell into a tight cluster of four other study markets. Consolidated net revenue: No Ancillary or outlet cost data was available for this market.

08 ¢ rank 16 rank* 17 rank* 17 rank* 16 sample size 4 General: Like Peace River. MJ ERVIN & ASSOCIATES 61 . thereby creating the potential for narrower margins.02 ¢ 11. remote market. Influence of other markets: Since is not located on a major inter-uban thoroughfare. they were comparable to other markets with similar average throughputs. Margin/Throughput relationship (Figure 24): Although gross product margins in this market were relatively high. It also experienced high freight costs. isolated markets.Thompson.000 14. Consolidated net revenue: Low outlet throughputs were offset by higher margins. Although outlets in Thompson appear to be as competitive as those of any other study market. and in fact fell into a tight cluster of four other study markets.014. Price history / Taxation: Thompson was typical of small.02 cents per litre. other markets. high pump prices. this market has little or no influence upon. Thompson is among the highest freight costs in the study group. the Thompson market experiences some competitive disadvantage due to its small population base and limited market potential. This however.975 5 6 4. Manitoba population # of brands # of outlets outlets per 10. Thompson is faced with the dilemma. would have the conflicting effect of reducing the consumer’s choice in a market with a limited choice to begin with. resulting in per-outlet petroleum revenues which were quite typical of many markets.01 rank 16 rank 15 rank 17 rank* 7 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. and due to its isolated locale in northern Manitoba.520 litres 14. Although ancillary revenues were the smallest of the study group. experiencing relatively high gross product margin and consequently. the community of Thompson clearly falls into the category of a small. further adding to overall high pump prices.1 ¢ 3. a significant portion of which would likely be distributed towards supplier overhead costs. and reduced pump prices. Geographic / Supply / Freight cost considerations: At 3. A reduction in the number of outlets might seem to be the best way to improve outlet throughput performance. Supply is via tanker truck from Winnipeg. its usual rack point. These factors resulted in relatively strong per-outlet net revenues. outlet costs were also modest typical of most smaller markets. nor is it influenced by. Other considerations: Like other small markets.

478 litres 3. Within this region are thousands of retail outlets. It consequently has a low freight component.06 cents per litre.06 ¢ rank 1 rank* 1 rank* 7 rank* 1 sample size 59 General: Within the study group.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Toronto Rack Price Canada Average .Toronto population # of brands # of outlets outlets per 10. this market ranked first in a number of measures: lowest gross product margin. On an ex-tax basis however. New York. this market was consistently less than the 10-city average. least number of outlets per capita. an outlet pumping significantly less than the average 5 million litres annually would not be likely to generate sufficient revenue to remain viable. Figure 32: Toronto . it is likely that outlet ancillary revenues are among the highest in the country. and first in average throughput per outlet.098. With an average “blended” gross product margin of only 3.ex tax Toronto Posted Pump Price Canadian Average Posted Pump Price MJ ERVIN & ASSOCIATES 62 .275.extax Toronto Posted Price . and is also relatively close to wholesale supply sources in the US. Consolidated net revenue: Although no study data was available for this market. as evidenced by an exceptionally low gross product margin. similar to that of Montreal.775 30 546 2.4 rank 1 rank 2 rank 2 rank* 1 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 5. stretching from Pickering to Buffalo.000 2.36 ¢ 0. This is likely offset by high operating costs. Price history / Taxation: 1995 posted pump prices in Toronto did not differ markedly from those of other major Canadian centres. exhibiting a lower margin than even expected of an extraordinarily high average outlet throughput. and a resultant low consolidated net revenue.3 ¢ 3. it had the second highest brand variety of the study group. Influence of other markets: This market is continuously linked with several other major retail markets. In addition. Geographic / Supply / Freight cost considerations: Toronto has nearby refining capacity. Margin/Throughput relationship (Figure 24): This market stood apart from the study group. thus there exists a climate of robust competition.

97 ¢ 0. margins and prices in Ottawa are typical of markets with similar throughput and net revenue characteristics. Although petroleum revenues were typical of major markets. some of which have on occasion priced below Ottawa (see Nanton and Calgary). in fact.145 19 209 3.948 litres 5.004.68 ¢ rank 2 rank* 4 rank* 6 rank* 4 sample size 39 General: Ottawa was very typical of major markets.29 ¢ 5. Influence of other markets: Although Ottawa is the only major market in the immediate area. rural markets co-exist in this area. and operating costs were higher than most. slightly lower that expected. several smaller. freight costs within this market were quite low. Other considerations: While pump prices in this market were somewhat higher than in Toronto.08 rank 5 rank 4 rank 6 rank* 4 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 4. Price history / Taxation: Pump prices in this market were comparable to other major centres when viewed on an ex-tax basis.Ottawa population # of brands # of outlets outlets per 10.ex tax Canada Average .000 678. Geographic / Supply / Freight cost considerations: As Ottawa is an established rack point. exhibiting all of the characteristics of robust competition. Figure 33: Ottawa . This would suggest that it was as competitive as any other major market of similar size and throughput characteristics.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Ottawa Rack Price Ottawa Posted Price . Margin/Throughput relationship (Figure 24): This market had the second highest average outlet throughput of the study group with a correspondingly low gross product margin. Consolidated net revenue: was low. and close to the Canadian 10-city average.extax Canadian Average Posted Pump Price Ottawa Posted Pump Price RUL MJ ERVIN & ASSOCIATES 63 . ancillary revenue was slightly lower than average.

95 rank 11 rank 10 rank 12 rank* 3 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. Margin/Throughput relationship (Figure 24): While this market had the third-lowest per capita outlet population of the study group (behind Vancouver and Toronto). Pump prices in this market were thus typical of any market with similar throughput characteristics.000 81.22 ¢ 7. Sault Ste Marie is a sizable market. Price history / Taxation: Ex-tax pump prices were relatively high compared to other Ontario markets. this Canadian market has some difficulty in remaining both competitive and viable.465.550 litres 8.475 10 24 2. Freight costs are therefore high. and accordingly. partly due to higher freight costs. Sault Ste Marie fell into a cluster of 10 study markets of between 3 to 4 million litres in average annual throughput. yet with some potential for cross-border retail competition. a product of relatively strong net petroleum revenues combined with lower than average operating costs.73 ¢ 1. Consolidated net revenue: This market showed the highest consolidated net revenue of the study group. Influence of other markets: This market is close to a US border market.Sault Ste Marie population # of brands # of outlets outlets per 10. a consequence of the transport distance from the rack point.51 ¢ rank 6 rank* 12 rank* 15 rank* 9 sample size 12 General: While situated at some distance from its nearest source of rack supply. MJ ERVIN & ASSOCIATES 64 . This would suggest that a significant market share is being lost across the US border. average throughputs were modest. Geographic / Supply / Freight cost considerations: Sault Ste Marie uses Toronto as its usual rack point. somewhat isolated. and between 5 to 8 cent per litre in gross product margin.

this market experiences a high degree of price competition. Geographic / Supply / Freight cost considerations: Sioux Lookout is normally supplied from the Winnipeg rack via tank truck. with little or no influence from other retail gasoline markets. so that virtually all sales volume represents local demand only. Price history / Taxation: Ex-tax pump prices were relatively high compared to other Ontario markets. Freight costs are therefore high.06 rank 18 rank 19 rank 19 rank* 16 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 694. Sioux Lookout is well-removed from any major highway.006 litres in 1995. An average outlet in Sioux Lookout pumped only 694.000 3. brands. largely due to higher freight costs. This is a major factor in the high cost of gasoline in this market. despite its high prices. It therefore presents some unique characteristics for the market study. in fact the second highest in the study group. and outlet throughputs of any market studied. and had the least number of outlets. although high. one-seventh the average throughput in Toronto.76 ¢ rank 19 rank* 18 rank* 18 rank* 18 sample size 2 General: Sioux Lookout was one of the smallest markets within the study group.96 ¢ 3. MJ ERVIN & ASSOCIATES 65 . This would suggest that.2 ¢ 11. Influence of other markets: This is clearly an isolated market. Margin/Throughput relationship (Figure 24): Sioux Lookout’s gross product margin. was much less than expected for a market of this size. Consolidated net revenue: No data was available for this market.066 litres 14.Sioux Lookout population # of brands # of outlets outlets per 10.310 3 3 9.

88 rank 2 rank 1 rank 1 rank* 11 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. thus promoting a competitive climate. On an ex-tax basis however. pump prices in Montreal have generally been at or below the 10-city average for major markets. Figure 34: Montreal .Montreal population # of brands # of outlets outlets per 10. placed Montreal lowest of all study markets in terms of consolidated net revenue. combined with low petroleum revenues and high operating costs. Consolidated net revenue: Montreal outlets had relatively poor ancillary revenues compared to the major market average. Influence of other markets: Like Toronto. and is also relatively close to wholesale supply sources in the US. This.775. an additional tax of 1.3 ¢ 5. this market ranks first of the study group in terms of brand variety.ex tax Montreal Posted Pump Price MJ ERVIN & ASSOCIATES 66 . with resultant low average outlet throughputs. a function of a competitive rack market and an excess of retail outlets competing for market share.43 ¢ 0. Price history / Taxation: As the figure shows.Price History 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Montreal Rack Price Crude Oil Price Canadian Average Posted Pump Price Canada Average .000 1. It therefore represents a highly competitive rack market. With 32 competing brands. Montreal was included in the selected market study.13 ¢ rank 7 rank* 2 rank* 7 rank* 2 sample size 74 General: As the largest retail gasoline market in the Quebec/Atlantic region. This market had the highest tax content of the study group due to high provincial tax rates (in 1996.5 cents per litre was introduced into the Montreal area). Geographic / Supply / Freight cost considerations: Montreal has local refining capacity. this market interacts with several other markets in the region. Montreal nevertheless exhibited a gross product margin which was well below that expected for these throughput attributes. pump prices in this market have a tendency to be volatile.extax Montreal Posted Price .394. Margin/Throughput relationship (Figure 24): This market would appear to be overrepresented in outlets compared to other major markets.144 litres 5.870 32 866 4.

within a cluster of other markets with similar attributes.2 ¢ rank 12 rank* 15 rank* 13 rank* 17 sample size 16 General: The Chicoutimi area was somewhat unique among the study markets in that there is a relatively large population base. although low. Consolidated net revenue: was average among the study group. but as the figure shows.Chicoutimi population # of brands # of outlets outlets per 10. but is quite isolated from any other markets. yet is geographically quite isolated. Freight costs are therefore somewhat high. Price history / Taxation: Chicoutimi benefited from a special Quebec tax reduction which applies to certain markets in remote areas and within 20 kilometers of the provincial border. this market has little potential as a rack market.289 litres 12.605 14 97 8. MJ ERVIN & ASSOCIATES 67 . by tank truck. Gross product margin was accordingly high. Nevertheless. Geographic / Supply / Freight cost considerations: Although some markets of this size support a viable rack market (Saint John.250.08 ¢ 11. both pump and ex-tax prices in this market were higher than average. Influence of other markets: The Chicoutimi / Jonquiere market represents a sizeable population base. for example).28 ¢ 1.75 cents per litre. Chicoutimi is normally supplied from the Quebec city rack. a partial factor in the high cost of gasoline in this market. were quite typical of markets with similar populations. Margin/Throughput relationship (Figure 24): Outlet throughputs.04 rank 10 rank 8 rank 9 rank* 15 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. this amounted to a reduction of 5.000 120. In the case of Chicoutimi.

this margin was only slightly higher than expected for a market with these throughput attributes. Consolidated net revenue: No data was available for this market.17 ¢ rank 18 rank* 19 rank* 19 rank* 19 sample size 2 General: Gaspé is a relatively small market.88 rank 13 rank 13 rank 8 rank* 12 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 981. Freight costs are therefore high.000 16. Margin/Throughput relationship (Figure 24): This market had the second-lowest outlet throughput of the study group. amounting to a reduction of 5. Nevertheless. a product of high freight costs and gross product margins.Gaspé population # of brands # of outlets outlets per 10.400 6 13 4. with little or no influence from other retail gasoline markets. by tank truck. Geographic / Supply / Freight cost considerations: Gaspé is normally supplied from the Montreal rack. MJ ERVIN & ASSOCIATES 68 .17 gross product margin the highest of the study group. Gaspé is well-removed from any major highway.75 cents per litre. so that virtually all sales volume represents local demand only. in fact the highest in the study group. located at a considerable distance from its rack source of supply. ancillary revenues would likely be modest.900 litres 17. both pump and extax prices in this market were higher than average. This is a major factor in the high cost of gasoline in this market. Price history / Taxation: Gaspé benefited from a special Quebec tax reduction which applies to certain markets in remote areas and within 20 kilometers of the provincial border. Nevertheless. in the case. Although operating costs are likely to be low in a small market like Gaspé. a key factor contributing to its 14.33 ¢ 14. Influence of other markets: This is clearly an isolated market.50 ¢ 3.

and therefore.Saint John NB population # of brands # of outlets outlets per 10. which for Saint John.970 9 56 7. Consolidated net revenue: was average for the study group.694 litres 9.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Saint John Rack Price Canadian Average Posted Pump Price Saint John NB Posted Pump Price RUL Saint John Posted Price .extax MJ ERVIN & ASSOCIATES 69 . Accordingly.47 rank 12 rank 11 rank 11 rank* 14 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. Influence of other markets: Although rack pricing is potentially subject to influence from other Atlantic coast terminals. Margin/Throughput relationship (Figure 24): Saint John is somewhat over-represented by retail outlets.27 ¢ 9. Figure 35: Saint John NB . resulting in lower than expected average outlet throughputs. The only real benefit that a local refinery provides is the modest rack-to-outlet freight cost factor. ex-tax prices were relatively high.000 74. Since provincial taxes are among the lowest in the country. do not differ markedly from any other rack point in the study group.095. reflected in the high ex-tax pump price. Nevertheless. Price history / Taxation: Historically. it is an established rack point. That a major refinery resides in this market might suggest that these prices should be among the least in the country. with or without a local refinery. In fact.ex tax Canada Average . retail pump prices are ultimately a reflection of rack prices. and is capable of shipping and receiving wholesale product through marine facilities. Geographic / Supply / Freight cost considerations: Saint John is home to a large regional refiner. Saint John presents some unique characteristics for the market study. posted pump prices in the Saint John market have closely followed the 10-city average. the Saint John retail market is relatively isolated from other retail markets of any significance.79 ¢ 0. freight costs in this market are low. Average gross product margin was consequently high. this market fell within the expected range of gross product margins as a function of outlet throughput.52 ¢ rank 14 rank* 13 rank* 4 rank* 13 sample size 17 General: As a major refining centre in Atlantic Canada.

Halifax
population # of brands # of outlets outlets per 10,000 330,845 9 113 3.42 rank 7 rank 11 rank 7 rank* 5 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3,058,010 litres 6.0 ¢ 0.27 ¢ 5.73 ¢ rank 11 rank* 5 rank* 4 rank* 5

sample size 18

General: As the largest population centre in Atlantic Canada, Metro Halifax was included in the selected market study. Geographic / Supply / Freight cost considerations: This market is served by a number of regional refineries, including one situated locally. Its marine port status allows for the potential import of refined product from any one of several refiners on the US east coast or western Europe. Influence of other markets: The Halifax/Dartmouth market represents a sizable population base, with a commensurate representation of retail outlets. It is relatively isolated from other retail markets of any significance. Price history / Taxation: For a number of years until mid-1991, retail pump prices, numbers and types of outlets and pump service (full vs self-serve) were regulated by that province’s Public Utilities Board (PUB). This structure was likely responsible for the historically high pump prices that existed in this market until late 1992. Since then, pump prices have generally fallen to reflect market conditions, and have on occasion, experienced price war activity, most notably in 1996, where at times, prices fell below the posted rack (wholesale) cost. Margin/Throughput relationship (Figure 24): Halifax exhibited a gross product margin well below that expected for these throughput attributes. While product margin ranked 5th lowest in the study group, outlet throughput was disproportionately low, ranking 11th. Consolidated net revenue: No data was available for this market.

Figure 36: Halifax - Price History
65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Apr-93 Apr-94 Apr-95 Apr-96 Oct-92 Oct-93 Oct-94 Oct-95 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96
Crude Oil Price Halifax Rack Price Canadian Average Posted Pump Price Halifax Posted Pump Price RUL

Halifax Posted Pump Price - ex tax Canada Average - extax

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Charlottetown
population # of brands # of outlets outlets per 10,000 15,395 5 23 14.94 rank 15 rank 15 rank 13 rank* 18 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 1,890,648 litres 11.17 ¢ 1.14 ¢ 10.03 ¢ rank 17 rank* 14 rank* 14 rank* 14

sample size 4

General: As PEI is the only province that regulates gasoline prices, Charlottetown was included in the study group to derive some insights into its possible effect on competitiveness. Geographic / Supply / Freight cost considerations: This market receives marine supply, usually from Halifax, but often from one of several marine terminals in the region, including Saint John, Quebec city or Montreal. Influence of other markets: Due to its island setting, retail consumers have little opportunity to shop adjacent markets for the lowest-priced gasoline. Price history / Taxation: Charlottetown has perhaps the consistently highest ex-tax pump price of any urban market in Canada. Margin/Throughput relationship (Figure 24): Charlottetown is probably over-represented by retail outlets, resulting in lower than expected average outlet throughputs. Average gross product margin was consequently high, reflected in a high ex-tax pump price, although it was comparable to other markets with similar throughputs. Consolidated net revenue: No data was available for this market. It is unlikely that the removal of price regulation would result in pump prices any higher than already exist in this market. Competitive disadvantages which exist in PEI markets are shared with many other non-regulated markets which exhibit a pattern of lower prices. Therefore, there is likely no consumer benefit, and there may be some detriment attached to the PEI regulatory structure, as evidenced by its pricing history and that of Halifax. Finding 22: Some instances of direct government intervention into petroleum marketing have been shown to have a possible adverse effect on competitiveness, and likely a negative impact on consumers.

Figure 37: Charlottetown - Price History
65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jul-92 Jul-93 Jul-94 Jul-95 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96
Crude Oil Price Halifax Rack Price Canadian Average Posted Pump Price Charlottetown Posted Pump Price RUL

Charlottetown Posted Price - ex tax Canada Average - extax

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Part E

Findings, Conclusions & Recommendations
This Retail Petroleum Markets study meets the study objectives of: • • • • providing a sound database for policy direction; providing a means to better understand competitive opportunities and challenges; assessing the viability and competitiveness of regional markets; and determining key competitiveness factors in specific markets.

The study thus provides a tool to understand the dynamics of this vital and complex industry, and a foundation for effective policy development.

Findings
This study presented twenty-two findings which are derived from the pump price model analysis, historical evaluation of pump prices and margins, and specific market analysis: Finding 1: Refiner and Marketing Margins are a consequence of their defining prices, in turn determined by competition on a continental (Rack Price) or a local (retail pump price) scale............................................................................................. 7 Finding 2: 1996 average crude price, as a factor of the regular gasoline retail pump price, was 19.1 cents per litre, or roughly 34 percent of the pump price................... 9 Finding 3: The infrastructure of the Canadian refiner sector provides the necessary conditions required for competitive, market-driven Rack (wholesale) pricing of petroleum products................................................................................................... 11 Finding 4: In 1996, petroleum taxes accounted for 50.3 percent of the average urban price of regular gasoline in Canada................................................................ 17 Finding 5: In 1996, the average Gross Refiner Margin available to Canadian petroleum refiners to provide for all operating costs and profits on the manufacture of regular gasoline, was 5.3 cents per litre............................................................... 17 Finding 6: In 1996, the average Gross Product Margin available to Canadian petroleum marketers to provide for all operating costs and profits on the sale of regular gasoline in a typical urban market, was 3.5 cents per litre. ......................... 17 Finding 7: Price uniformity and price volatility, facilitated through street price signs, are indicators of a competitive market........................................................... 21 Finding 8: Some competitiveness inhibitors may exist in the retail gasoline market which are regulatory in nature, but exist to meet other important societal needs.... 23 Finding 9: Pump prices are established by the local dealer at over half of all retail outlets in Canada. ..................................................................................................... 28 Finding 10: Gasoline has remained at or below the “all items” Consumer Price Index nine out of the past ten years.......................................................................... 31

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........ 52 Finding 22: Some instances of direct government intervention into petroleum marketing have been shown to have a possible adverse effect on competitiveness........ residuals for outlets not studied may be better............................................................ 32 Finding 12: Retail pump price increases from 1994 to 1996 are wholly attributable to increases in petroleum product taxation and crude costs...................................... the profitability of the 481 outlets studied appears only marginal....... 37 Finding 16: Provincial differences in product taxation are a predominant cause of inter-regional pump price differences....... .......... 71 MJ ERVIN & ASSOCIATES 73 ... 50 Finding 20: For the 481 individual outlets studied....... the average tax content of regular gasoline pump prices in major Canadian cities increased by about 5 cents per litre......................... ..............Finding 11: Retail pump price trends are principally a reflection of changes in the underlying rack (wholesale) price of petroleum products....... a feature of most market-regulated commerce............... while those with high Gross Product Margins tend to have low outlet throughputs............. In effect............................. 48 Finding 19: Based on published rack prices... when compared on an ex-tax basis.... petroleum sales revenues alone were insufficient to cover operating costs for the 481 outlets studied.. .... reduced pump prices.... The viability of the Canadian retail gasoline sector as a whole may be somewhat better.............................. Taking into account the possible discounts from posted rack prices and independent brands’ lower marketing overheads.............. after the average 1995 consolidated revenues were distributed to meet dealer income and the supplier’s marketing overhead requirements.................................................................................................. 33 Finding 14: Canadian retail gasoline pump prices are the competitive equal to those of the US..... while average combined Gross Refiner and Gross Marketing Margins decreased by about 7 cents per litre......... the residual represented a net loss to the supplier............... and likely a negative impact on consumers....................... which in turn......................................... 45 Finding 18: After accounting for differences in taxation and freight the remaining difference in retail pump prices between markets is very closely linked to market differences in average sales volumes such that markets with low Gross Product Margins are associated with high outlet throughput volumes.......51 Finding 21: Based on published rack prices and the individual outlet data...... are principally a reflection of changes in the underlying price of crude oil... remote population centres. particularly in comparisons of major urban markets to small............... given the possibility of discounts from posted rack prices and potentially lower overhead costs....... ... .......................................... 33 Finding 13: From 1991 to 1996............. 43 Finding 17: Market-specific differences in product freight are a key factor in intermarket ex-tax pump price differences.................... 35 Finding 15: Seasonal fluctuations in retail pump prices are ultimately linked to wholesale product inventory levels...... The study average retail gasoline outlet would have experienced a net loss without the contribution of ancillary operations......... these ancillary operations contributed to a lower product margin and consequently............................. which ensures a competitive product price for buyer and seller alike.

The study presents such a model. As described in this study however. exhibited a diminishing trend (Finding 13). in comparing Canada average (city) pump prices to those of the United States.Conclusions The study findings lead to a number of conclusions relating to the competitiveness of Canada’s petroleum marketing sector. is mistaken. Canadian prices have been at or below US prices in recent years. This price/margin model illustrates that the various sector margins are a consequence of the prices at which feedstock or wholesale product is bought and then sold (Finding 1). was observed (Finding 10). was shown to be strongly competitive: • A long-term decline in pump prices. Although an objective measure of competitiveness is elusive. In comparing several diverse markets. Rack and pump prices are determined in competitive marketplaces. the very margins within which this industry operates has. Closer examination of these strategic tools might yield additional insights into the nature of competition in this industry sector. and promotions are the other three). Critical to the overall success of this study was the development of a model which would create a common frame of reference for the considerable terminology that accompanies an industry as complex as Canada’s petroleum sector. by all objective measures available to this study. price is but one of four competitiveness “tools” available to marketers (product. a variety of available data suggests that a state of vigorous competition exists in the Canadian petroleum marketing sector. • • These findings are likely in sharp contrast to a common public perception of this industry in general and price trends in particular. 2. On a national level. This has not simply been a result of a decline in underlying raw materials costs. The economic relationship of the petroleum marketing sector with its related stakeholders is a complex one. place. Virtually all of the competitiveness indicators examined in this study relate to price. which also serves to illustrate the interrelationships between the various stakeholders who ultimately receive the revenue from the sale of a litre of gasoline. The resultant margins. The contrary notion that a given refiner or marketer is free to establish a price based upon a minimum margin requirement. a consistent pattern of competitiveness emerged when comparing product margins to their associated average outlet throughputs (Finding 18). which at times can decline to very low or MJ ERVIN & ASSOCIATES 74 . when measured in constant and nominal dollars. over the long term. each with unique dynamics. when taxes were excluded (Finding 14). 1. The Canadian retail petroleum products industry.

provincial. or 6 percent (Finding 6) of the 1996 average regular pump price. taxation differences between Canadian and US markets. and do. Due to the localized nature of competition in the retail gasoline marketing sector. but even in such cases. measured against the average outlet throughput for that market. or even between Canadian markets with differing tax structures. presents a competitive disadvantage to Canadian marketers. the resultant margins were found to display a distinct relationship with average outlet throughputs for each market. While some markets. municipal levels of government. the responsibility for deciding upon retail pump prices was shown to reside principally at the local dealer level (Finding 9). 3. generally do not serve as competitiveness inhibitors. taxation as an element of public policy is an area worthy of additional research. but not beyond the reach of any organization wishing to truly understand petroleum competitiveness issues. By contrast. Petroleum product taxes are levied at the federal. since this is the effective range of consumer choice. refiner margins accounted for 5.5 cents. an exercise that consumers are unlikely to engage in. when the “outside” factors (tax. The demonstrated exception to this is in markets directly adjacent to nearby US markets. particularly smaller ones. but also rack prices and outlet performance. and product margins accounted for 3. The latter two can vary considerably from one market to another. Taxation is a significant factor in the price of retail gasoline. experienced higher than average pump prices. This implies that the competitive dynamics pertaining to these retail markets can. for example) were rationalized. crude costs accounted for roughly 34 percent (Finding 2). This study’s analysis of NRCan urban regular gasoline prices shows that the tax content in a typical consumer’s gasoline purchase is about 50 percent (Finding 4). and in some markets. In applying such a model to the retail petroleum marketing industry. it is important to understand that. demand and other competitive factors existing at the time. are thus a reflection of the state of product supply. This would entail the tracking of not only pump price. and accordingly. Dealers were shown to have a variety of relationships with their supplier. A much more accurate barometer of industry competitiveness would therefore be the rack-to-retail or gross product margin. and are a predominant cause of inter-regional pump price differences (Finding 16). MJ ERVIN & ASSOCIATES 75 . and in some markets.3 cents or 9 percent (Finding 5). these markets have managed to sustain a certain level of viability and competitiveness. but given its magnitude.even negative values. vary considerably from one population centre to another. rack price and freight cost. retail petroleum markets are considered local (municipal) in scope. well over half of all outlets in Canada operate as lessees or independents. while crude oil markets are considered global in scope and rack product markets are considered regional in scope. The measurement and analysis of the effect of petroleum taxation levels in Canada compared to other countries is well beyond the scope of this study.

reflecting consumer demand behavior (Finding 15). which in turn is the principal driver of ex-tax pump prices. 5. dealer income. This consolidated outlet revenue. While these findings are somewhat qualified in terms of this study’s use of posted rack prices as the derivation basis. and a loss in the case of urban markets. which represent the majority of Canada’s population base. 4. is available to provide for all retail marketing operations including outlet costs. This margin represents gross revenue (after wholesale product and freight cost) which. a price-stable market. incorporated with ancillary revenues and outlet costs. While price wars are undoubtedly an indicator of competitiveness. on the basis of price fluctuation alone. the Canadian retail marketing sector realized an average gross margin of 3. Retail pump prices showed a corresponding seasonal pattern. In fact. showed a close relationship to underlying crude prices (Finding 11). The pump price/margin model shows that in 1996. predictable seasonal pattern. fluctuating prices are a strong competitiveness indicator (Finding 7). This study’s marginvolume model could detect no difference between price-volatile markets such as Toronto. translates into supplier profits of an estimated one cent per litre of petroleum sales in the case of smaller markets. Rack prices were shown to not significantly differ between major centres. exhibited competitive traits typical of any of the study markets. This relationship between price and demand was cited as the essence of competitiveness in the petroleum rack marketplace. when distributed these three ways (Finding 20). Demand for gasoline was shown to vary significantly according to the time of year. MJ ERVIN & ASSOCIATES 76 . when examined on the margin-volume model. Pump price fluctuations can be an indicator of competition in the marketplace. in a highly distinct. Sioux Lookout.5 cents per litre on the sale of regular gasoline in a typical major urban market (Finding 6). which in turn. the absence of price war activity does not imply a lack of competitiveness. second only to the United States. Viewed from this perspective.Canadians nevertheless enjoy one of the lowest average gasoline taxes in the industrialized world. constitute a small portion of the retail pump price. on a per litre basis. Retail gasoline marketing revenues. Retail pump price changes showed a close relationship to underlying rack prices. and more price-stable markets such as Sioux Lookout. supplier costs and profitability. further suggesting that a strongly competitive environment exists in the refiner sector as well (Finding 3). it can still be concluded that the petroleum marketing sector constitutes a small portion of the total retail pump revenue distribution.

6. despite increases in tax content and crude costs (Finding 12). While these economics might appear to place this industry in a position of poor viability. assuming all other costs were unchanged. It is likely that regional and nonrefiner marketers operate with somewhat smaller overhead costs than those used in this study. not price. have caused. serve as perhaps the most significant indicators of competitiveness in the downstream industry. these findings clearly show that pump price increases are ultimately linked not to increased profits. crude costs. Thus. and in turn. including: • • • improving production efficiency through refinery plant rationalizations (closures). improving retail outlet performance through outlet rationalizations (closures) resulting in higher unit throughputs (sales volumes). and have resulted from. most outlets used in the 19-market study represent major integrated oil companies. Declining refiner and marketing margins. Changing conditions in Canada’s downstream petroleum sector have caused retail pump prices to remain relatively flat since 1992. profit margins in this sector can be stated to be in the order of 1 to 2 cents per litre in a “good” year. This trend has both resulted in. although pump prices in some markets can fluctuate by several cents per litre in the course of a week. several competitive strategies. intense competitive pressures in the downstream industry in general. the combined downstream (refiner and marketing) margin in Canada decreased by about 7 cents per litre (Finding 13). Annual residual profits available to petroleum marketers is in the order of perhaps one cent per litre. Nevertheless. A truly objective barometer of downstream industry influence on retail pump price lies in the measurement of margin. not excessive profits. MJ ERVIN & ASSOCIATES 77 . and has been a result of. Both the downward trend in margins. Also. Thus. Industry profitability is extremely sensitive to very small changes in pump price. 7. and the associated industry initiatives which are ongoing in nature. pump price signs are particularly ineffective as a barometer of petroleum marketer competitiveness and profitability. the rack price basis used in this study probably understates actual revenues by about 1 to 2 cents per litre. emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs. and the marketing sector in particular. Also. if Canadian average pump prices were only one cent higher than they were in 1995. based upon an assumed posted rack price. despite the predisposition of many observers to use them as such. but to increases in underlying rack prices. Indeed. both of which are beyond the direct influence of Canada’s oil companies. in the long term these fluctuations are likely more reflective of market restorations. Since 1991. this industry sector would have realized profits of unprecedented proportions.

from 3 cents per litre in Toronto to 14 cents per litre in Gaspé. virtually all of the 19 study markets exhibited similar levels of competition. likely due to the different geographic and lifestyle differences that exist in small communities compared to major cities. In suggesting this approach however. in order to generate sufficient revenue to cover the outlet’s fixed operating costs. more isolated markets are generally higher than in larger centres. which should. When these margins were compared to their corresponding outlet throughputs. and therefore suffered an additional distribution cost disadvantage of about 2 cents per litre on average (Finding 17). Outlet throughput is a key determinant of inter-market pump price differences. it would seem that if local government in smaller markets were interested in lowering pump prices. poor outlet throughputs were generally the predominant factor. Although some smaller markets appeared to have higher gross product margins than larger markets. High distribution costs Smaller markets are generally further removed from their source rack point than larger centres. had petroleum margins which were commensurate with average outlet throughput for that market. When plotted against the margin-volume model. the solution would be to encourage some dealers to exit the market. This was due to three factors: • Low average outlet throughputs The average group B outlet sold approximately 1. a distinct pattern emerged: an inverse relationship between retail gross product margin and the average outlet throughput associated with that market (Finding 18). other factors exist which contribute to relatively high margins and prices. 9. Low ancillary revenues Outlets in smaller centres received significantly less ancillary revenue than their group A counterparts. although this study provides comprehensive evidence of this. reducing the number of outlets may also reduce the number of competitors. isolated markets face particular challenges: although found to be highly competitive.5 million fewer litres of gasoline than a group A (major centre) station. MJ ERVIN & ASSOCIATES 78 . average pump prices were relatively high. Thus. The costs of most consumer goods in smaller. Smaller. regardless of size. most markets. That such a relationship should exist was not surprising. This created some economic pressure to sell product at a higher pump price. there are three points to consider: • In very small markets. reduce pump prices. thereby improving petroleum volumes and ancillary revenues at the remaining sites. according to the margin-volume model. While competitiveness in most smaller markets was shown to be as active as in larger centres. and this study showed that gasoline prices were no exception. which could actually inhibit competition. A wide range of petroleum gross product margins were evident within the 19market study group. • • At first glance.8.

MJ ERVIN & ASSOCIATES 79 .• A full-serve retail gasoline outlet typically employs 3-5 staff. as marketers find even more innovative ways to attract market share. Government intervention into petroleum marketing is likely a poor alternative to market-based regulation. Convenience store. is well beyond the scope of this study. under the current PEI regulatory structure. and the traditional automotive service bay. many national and local environmental regulations exist for good cause. has seen a decline in pump prices relative to other Canadian markets. Some impediments to market exit may exist in the form of petroleum underground storage tank regulations which may present to the operator the option of pumping gas as the better alternative to decommissioning the site and possibly incurring prohibitive remediation costs. depressed petroleum revenues below that of outlet operating costs. This will be driven by the depressed petroleum product margins which currently exist in the petroleum marketing sector. were cited as examples of ways in which outlet petroleum sales are augmented by other revenues. A full analysis of the various features of the Nova Scotia and PEI regulatory structures. Non-petroleum revenues at retail gasoline outlets will continue to gain prominence. This competition then. in order to build upon the findings in this study towards a full understanding of the dynamics at work. and the perceived effect on their markets. The historical record is clear however: since deregulating pump prices. and in turn. the degree of price competition in the retail petroleum has in effect. car wash. The loss of employment represented by a station closure may be of some concern to smaller communities. Retail ancillary operations are a critical element of petroleum price competition. The 19-market study provides some insights into the issue of whether or not regulated retail gasoline markets serve to benefit consumers (Finding 22). and as such. the Halifax market. and likely others in Nova Scotia. The federal Competition Bureau for example. will likely preserve a highly competitive petroleum market. does not appear to benefit in consumer terms. Charlottetown. 10. Also. This is not to say that all direct government intervention into marketing practices is certain to produce undesirable results. As these findings show. is viewed as an agency which exists to the benefit of industry and consumer alike. are an acceptable limitation on pure competition (Finding 8). • The particular competitiveness and viability issues facing smaller markets is an issue worthy of further study. characterized by narrow product margins and relatively flat pump prices. Ancillary or non-petroleum revenue is described as an increasingly important feature of the retail gasoline marketing demography (Finding 19). is both the cause and consequence of increased activity in ancillary operations. 11.

2. Industry and government have an opportunity to continue to work together in cooperative research similar to that which this study represents. that where a healthy competitive climate exists. Organizations such as the Canadian Petroleum Products Institute and the Petroleum Communication Foundation would therefore have an expanded role to play in commissioning and regularly disseminating the results of these recommended initiatives. Improve public understanding and awareness of competition in the petroleum marketing sector. as it does in the Canadian petroleum marketing sector. This should be in the form of a quarterly summary of price trends and related measurements. margins and competitiveness factors. Recommendations This study advances two recommendations to enhance the existing competitiveness in Canada’s petroleum marketing sector. A regular comprehensive competitiveness evaluation. This study alludes to several potential study initiatives which go well beyond the objective of public awareness and may assist both the public and private sector policy and strategic directions: MJ ERVIN & ASSOCIATES 80 . Research into the specific competitiveness issues of concern to consumers would provide valuable direction for groups conducting industry competitiveness research. direct regulatory interventions may have an adverse effect on competitiveness. Individual companies within the retail petroleum industry have been reluctant to speak directly to the issue of gasoline pricing and competitiveness. Public perception measurement. in a simple format designed for consumers and legislators. Ways in which this gap can be closed might include: • Ongoing third party evaluation of prices. and the nature of competitiveness influences. • • Would this enhance the competitiveness of this sector? It is felt that better public understanding of this industry’s record of competitiveness. This study might be used as the concept basis for a comprehensive annual update of price/margin trends and selected market competitiveness research. would ultimately be reflected in carefully-considered public policy which serves to truly enhance. A recurrent theme arising from this study’s conclusions is the likely gap that exists between the demonstrably high level of competition within this industry sector. Develop cooperative industry research into marketing sector competitiveness issues. petroleum marketing competitiveness. not inhibit.This study proposes rather. and the converse image held in much of the public domain. 1. possibly to the detriment of the consumer.

along the lines of the model used in this study. A better comprehension of the true issues and opportunities facing this industry would be an important step in the right direction towards stable and effective policy. Regulatory Intervention: Historical and theoretical research into government regulation of petroleum markets. and in particular. Marketing Strategy Effectiveness: Research into price and non-price marketing strategies and their relative influence on consumer response.• Price/Margin Modelling: Development and adoption of a standard price model and associated terminology by industry/government. Taxation: An analysis of taxation levels on industry and consumer behavior and as a tool of policy and revenue. by industry. MJ ERVIN & ASSOCIATES 81 . using Canadian and foreign selected markets. Lack of understanding of this industry can lead to misguided policies which benefit neither the industry nor the consumer. and issues/opportunities facing such markets. is vital if Canadians are to put in place the structures that truly meet their social and economic needs. Small Market Competitiveness: Detailed research into small market outlet economics and competitiveness. the possible effect of underground storage tank legislation as a potential barrier to market exit and competitiveness inhibitor. using Canadian and foreign selected markets. using Canadian and foreign selected markets. and regulators alike. consumers. • • • • * * * Better understanding of this industry.

Appendices MJ ERVIN & ASSOCIATES 82 .

service bays.. provincial pump tax.Canadian Petroleum Products Institute. safety and business issues.I Glossary of Terms Ancillary service . lubricants.a service provided in addition to the basic retail petroleum sales operation. Integrated Oil Company . such as a major oil company or regional refiner/marketer.the difference which exists between net sales and the cost of merchandise sold and from which expenses are usually met or profit derived. and purchases petroleum products from the same supplier for resale at a pump price determined by the lessee.a particular mode of retail petroleum operation where the outlet operator (dealer) leases the retail outlet from the product supplier. for example. Excise Tax . and commission dealers.a petroleum organization involved in both the refining and marketing of petroleum products which has marketing operations in most or all of Canada’s provinces. Marketer . municipal tax levees. but inclusive of any corporate taxes on earnings.a petroleum marketer which is involved in both the upstream and downstream aspects of the oil industry. etc. and in some regions. Lessee .a generic term referring to a retail outlet operator.the segment of the oil industry involved in the refining and/or marketing of petroleum products such as gasoline. etc. Margin . which serves as the voice of the petroleum products industry in Canada on environment. independent dealers. the regular unleaded pump price. Dealer . generally expressed in cents per litre. such as convenience goods. in cents per litre. These product taxes include Excise tax.a petroleum marketer who is not involved in the refining of petroleum products. Grade Differential . MJ ERVIN & ASSOCIATES 83 .the difference in pump price between a premium or mid-grade of gasoline vs. and therefore purchases its supply of petroleum product from an outside source. Distribution Costs . such as a retail gasoline outlet. Downstream . Ex-tax Pump Price . The ex-tax pump price is exclusive of these taxes. currently established at 10¢ per litre. and included in the retail pump price. an association of petroleum refiners and marketers.a federal tax on retail gasoline purchased by domestic (ie: motor vehicle) consumers. GST. Usually expressed on a per-unit basis. such as lessees. health. CPPI . of transporting petroleum product from the rack point to the final point of sale. Independent Petroleum Marketer .the retail price of gasoline that would be displayed if all product taxes were removed. car wash. Major Oil Company .. There are several modes (see below) of dealer operation.(for the purpose of this study) the cost.an organization who sells refined petroleum products to end-use consumers. diesel.

This may be at a refinery loading terminal.the internal price paid by an integrated refiner/marketer to its own refinery for refined petroleum products. with a non-advocacy mandate to improve public awareness of Canada’s petroleum sector.Petroleum Communication Foundation. PCF . it is usually based on the market-driven rack price.the wholesale price posted at the rack point. Although in theory the transfer price could be set at any arbitrary value. Rack Price . Transfer Price . Upstream . is typically also the brand name owner of the chain of gasoline stations to which it supplies refined petroleum products. manufactures (from crude oil) a range of petroleum products suitable for consumer use. usually per month or per year.the volume (ie: in litres) of petroleum sold at a retail outlet in a given period. Throughput .within the context of retail gasoline marketing. Regional Refiner/Marketer .a petroleum organization involved in both the refining and marketing of petroleum products which has marketing operations in a limited number of provinces.Mode . commission dealer.the point at which title to refined product is transferred from the refiner to the supplier. these can be broadly classified as company operated. In the retail gasoline sector.an organization who. lessee. Supplier . or at one on several loading terminals (usually in major population centres) where petroleum is marketed to non-refiner supplier/marketers at posted rack prices. the raw material from which petroleum products are manufactured.the type of contractual relationship between the supplier and the dealer (outlet operator). and independent dealer.the segment of the oil industry involved in the exploration and/or production of crude oil. Refiner . the supplier has initial title to the petroleum product as it leaves the rack point. an association of upstream and downstream oil companies and related organizations. MJ ERVIN & ASSOCIATES 84 . Rack Point .

9 97.1 87.2 92.7 Note 1 Note 2 Note 3 Price Index data is from Statistics Canada Cat.8 93.2 49.3 40.5 112. No.2 20.0 1991 126.6 133.2 45.3 27.8 94.4 152.1 151.6 92.2 133.9 108.2 121.1 167.3 122.8 108.3 134.II Source Data Tables Table A: CPI Index: Selected Goods and Services Year **All Items** (1) Food Shelter Natural Gas Fuel Oil Telephone Gasoline Auto Repair Alcoholic Beverages Domestic Water Domestic Electricity RUL Annual Price.1 120.6 91.1 120.4 104.7 30.9 26.9 118.2 31.3 132.4 34. Constant dollar RUL gasoline values were derived by applying the “All Item” CPI to the nominal price for that year.7 132.7 118.5 145. 62-010: Consumer Prices and Price Indexes.4 110.1 126.3 52.1 48.3 58.2 109.7 122.2 99.2 112.5 120.5 49.8 132.1 1990 119.4 53.4 136.0 19.4 104.2 39. Nominal RUL (Regular Unleaded) price and ex-tax price is from Natural Resources Canada.3 1989 114.4 29.3 19.4 97.3 151.0 135.0 111.1 26.9 26.2 50.0 97.6 51.1 104.3 1992 128.0 93.1 105.4 27.5 30.3 139.1 97.2 127. Nominal (¢/litre) (2) RUL Annual Price.7 95.5 126.5 25.6 122. MJ ERVIN & ASSOCIATES 85 .1 40.9 155.5 124.3 125.2 30.1 104.5 111.0 102.4 124.0 93. 1986 Constant (¢/litre) (3) RUL Ex-tax Price.3 141.5 115.5 100.7 22.1 103.7 123.0 42.0 1988 108.8 1987 104.0 30.7 96.7 29.9 115.4 57.4 134.1 144.2 45.9 1994 130.3 115.7 124.1 115. Nominal (¢/litre) (2) RUL Ex-tax Price.4 45.4 120.9 122.0 115.3 119.6 136.3 96.4 122.7 54.3 160.2 142. 1986 Constant (¢/litre) (3) 1986 100 100 100 100 100 100 100 100 100 100 100 47.1 146.8 28.8 135.1 117.9 1993 130.8 106.5 94.6 107.9 1995 133.0 104.8 47.1 117. using a weighted (by provincial gasoline demand) 10 city average.8 95.3 55.8 130.0 32.8 104.

5 22.8 23.6 18.7 6.5 5.5 15.7 25.5 33.1 23.3 23.3 58.7 14.0 14.6 13.2 27.3 56.5 19.4 21.2 24.4 20.1 39.9 23.2 56.8 16.5 14.2 6.2 14.4 33.4 32.9 12.1 9.5 7.0 24.1 7.7 14.9 17.8 23.9 8.0 5.6 54.9 7.4 26.2 14.2 12.6 4.7 18.3 57.9 53.8 15.1 52.7 7.7 7.8 26.2 13.6 52.0 7.5 14.4 14.7 19.0 24.6 7.2 26.9 4.1 13.2 7.9 58.5 23.0 8.0 52.8 9.9 55.3 15.0 55.9 13.7 24.5 32.6 26.5 6.3 6.5 11.1 16.5 26.6 20.1 22.1 16.7 4.0 22.2 41.3 17.5 Gross Marketing Margin Gross Refiner Margin 53.9 31.2 15.7 13.8 24.7 15.2 27.3 66.1 24.2 23.2 5.7 58.3 12.7 14.9 6.7 28.3 54.0 54.3 56.2 25.1 5.5 54.8 14.2 21.5 10.0 16.9 23.0 24.Regular Gasoline RUL Canada Avg Jan-90 Feb-90 Mar-90 Apr-90 May-90 Jun-90 Jul-90 Aug-90 Sep-90 Oct-90 Nov-90 Dec-90 Jan-91 Feb-91 Mar-91 Apr-91 May-91 Jun-91 Jul-91 Aug-91 Sep-91 Oct-91 Nov-91 Dec-91 Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Pump ex-tax Rack Crude Price Pump 10 city Avg Edmonton 30.2 25.8 22.4 13.4 14.4 12.0 16.9 26.8 26.1 19.4 15.0 16.5 25.1 13.8 33.4 26.4 53.8 29.7 4.0 25.0 24.9 25.8 8.7 7.1 23.9 7.6 9.0 13.8 21.4 56.4 13.6 25.Table B: Key Price / Margin History .0 16.1 18.5 30.7 29.5 23.4 24.2 7.9 55.8 30.1 25.6 25.8 8.7 19.3 42.3 6.8 14.1 7.5 27.0 12.9 26.4 31.4 8.0 9.6 26.3 13.9 56.8 53.8 28.1 16.3 13.2 63.5 56.5 35.9 53.7 12.9 22.5 31.5 27.7 39.5 28.4 57.3 13.6 54.3 13.4 9.3 26.8 55.0 15.1 13.7 8.7 63.2 16.6 23.4 58.2 13.4 14.2 7.7 23.7 29.6 8.3 25.5 23.8 55.4 24.8 57.4 31.7 14.0 25.3 26.0 7.9 7.7 34.1 53.3 54.2 16.6 54.9 6.7 33.3 5.5 16.2 7.0 26.9 30.8 13.6 21.1 23.9 56.1 53.3 54.4 7.1 16.9 23.4 29.8 14.8 11.7 18.9 25.9 14.0 24.7 Downstream Margin 14.6 6.2 13.9 14.8 14.9 6.0 24.0 28.3 14.1 21.5 8.1 22.7 31.3 9.9 4.0 24.3 4.6 28.5 7.9 25.2 22.2 26.6 26.4 30.3 13.6 13.2 13.0 26.9 11.1 18.0 20.2 23.3 24.0 10.5 57.9 25.0 33.4 MJ ERVIN & ASSOCIATES 86 .6 24.1 29.7 14.5 10.7 4.1 17.2 4.4 55.2 27.9 25.2 11.0 7.9 54.4 34.9 15.7 29.2 29.2 8.9 24.4 26.5 26.3 15.3 22.2 6.8 21.6 5.7 32.3 22.8 25.6 23.9 9.4 22.8 53.3 Tax Content 23.0 26.9 21.0 4.4 14.2 65.

1 20.3 26.7 52.0 28.5 55.0 11.4 25.5 2.8 52.0 26.5 11.0 12.2 25.5 6.2 27.6 10.0 5.7 53.5 13.3 7.6 3.4 13.2 14.5 54.0 29.5 3.3 26.1 10.6 23.1 3.0 52.0 53.2 28.7 8.3 26.9 27.9 14.5 7.1 11.0 54.8 50.5 11.1 6.0 25.6 27.5 4.1 26.4 26.0 28.2 14.3 13.2 14.6 53.1 21.6 10.1 26.7 3.5 19.1 24.8 29.8 10.7 14.8 25.3 4.0 6.7 7.3 7.7 53.4 26.4 26.2 23.1 Gross Refiner Margin 7.1 15.5 13.4 26.2 4.3 27.0 12.7 16.9 29.1 61.9 26.2 12.3 21.7 29.4 4.5 20.7 6.3 4.7 5.4 21.3 23.0 24.6 11.1 16.5 7.9 9.3 26.9 17.6 53.4 5.7 5.1 Tax Content 26.0 14.2 26.6 21.7 7.5 21.3 26.8 49.4 11.3 25.4 24.1 51.1 55.3 21.4 6.3 28.1 6.3 54.4 51.8 6.8 27.6 16.4 32.9 Downstream Margin 12.3 8.2 26.3 58.5 5.8 23.5 6.6 20.3 6.8 17.1 26.1 51.RUL Canada Avg Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Jan-96 Feb-96 Mar-96 Apr-96 May-96 Jun-96 Pump ex-tax Rack Crude Price Pump 10 city Avg Edmonton 26.1 source: Natural Resources Canada MJ ERVIN & ASSOCIATES 87 .2 20.7 26.9 27.7 24.0 28.2 7.3 9.4 6.6 4.9 4.0 6.7 25.7 26.0 5.9 6.5 19.9 49.9 49.7 23.2 9.6 15.7 18.7 24.8 23.2 26.2 7.6 12.5 25.3 26.8 28.1 14.3 12.6 20.5 3.6 17.0 9.7 6.5 9.1 54.4 16.6 19.1 14.1 15.5 28.3 26.2 Gross Marketing Margin 4.3 55.9 5.5 17.7 15.5 15.5 21.9 12.3 9.5 14.5 21.5 5.3 9.9 29.7 13.7 13.7 25.8 20.8 28.0 25.5 6.1 14.0 57.9 23.4 25.0 28.3 53.9 14.0 6.3 26.9 58.7 51.0 28.4 15.4 6.4 7.0 27.5 53.5 23.6 5.2 20.0 14.2 15.4 28.8 4.2 7.3 26.4 21.2 11.3 4.1 15.6 9.6 4.9 3.8 22.7 3.1 6.2 54.7 12.1 6.9 28.0 9.1 11.3 28.2 49.1 11.2 25.9 11.4 6.2 5.2 7.2 4.1 57.9 19.9 12.7 53.1 11.6 15.9 4.0 26.7 14.

622.462.661 Canada Avg ex tax RUL pump price (¢/l) 39.120.2 26.299.818.6 28.878 2.890.262.930.366 2.070 3.966.532.298 2.804 2.876.0 28.782 3.047 2. Demand.5 31.089.4 22.8 23.6 26.682.161.3 22.677 3.122 2.799.000 3.970.323 3.457 2.047 3.604 2.102.160 3.667 2.801.709 2.709 2.329 3.853.3 22.256 2.270 3.7 34.808.673 2.613 3.509 3.8 30.075.688.1 23.612 3.5 32.516.642.714.333.056 3. and Pump/Rack Prices Net Canadian Closing Supply: Gasoline Canada Production (M3) Inventory (M3) Jan-91 Feb-91 Mar-91 Apr-91 May-91 Jun-91 Jul-91 Aug-91 Sep-91 Oct-91 Nov-91 Dec-91 Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 2.254.779 2.326.294.508.035 2.886 3.301.580 3.973.4 29.979 2.628 3.152 2.4 32.823.263.354.268 2.235 3.873. Inventory.220.2 23.369.325 2.2 27.822.8 29.181.429 2.840.853 3.188 3.979 3.8 33.199 2.651 2.889 3.9 26.346.1 21.369 2.968 3.255 3.558.9 30.859 2.191 2.687.636.245.839 2.970 3.654.6 21.133 3.429 2.019.067.600.3 23.900.283.8 MJ ERVIN & ASSOCIATES 88 .9 23.193 3.897 2.2 27.322 3.300.771 3.389.510 3.646 2.411.865.285 2.101 2.831.8 22.Table C: Canadian Supply.565.5 28.254.843.251.322 2.180 3.684 2.626.070.430.037 2.461 3.377.180 2.132.9 26.884 2.415 2.3 Canada Avg RUL Rack Price (¢/l) 35.837.666.232 3.477.625 2.796.378.141.030.501.085.587.864 2.8 21.938.748 2.9 23.5 23.379.1 22.286.521 2.2 22.744.620 3.313 2.615 2.592 2.781.785.182 3.589 3.7 21.952.322 2.331 2.880 Canadian Retail Gasoline Sales (M3) 2.887.969 2.140.095 2.672.853 2.813 2.1 16.427.630.475 2.083.0 20.112 2.476.671.437.502 2.297 2.141.609.4 25.301 2.810.338 3.9 29.015 3.933 3.958.242 2.627 2.101.081.045 2.752 2.732.218.403 2.894.2 20.4 21.941 2.193 3.250.269 2.299 2.8 26.904.422.045 2.441.246 2.869 2.773.439.995.218 3.020 2.490 3.254 2.5 19.9 31.893.3 26.647.029 2.970.636.7 24.381 2.572 2.095.931 3.599 2.5 25.5 22.1 29.716.130 3.2 23.641.179 3.544 3.0 24.373.9 23.311 3.176 3.361.935 3.748.693 3.437.7 31.324 2.168 2.5 27.279 2.733 2.7 29.051 3.025.316.767.2 27.930 3.2 24.8 23.998.566.479 2.301.739.8 28.703 2.206.2 29.287 2.5 27.644 3.416 2.450 2.564 2.827 3.6 23.9 17.9 21.883.039.720 3.485 2.841 2.621.443 2.027 2.897 3.4 31.164.131.151.932 2.871 2.960.830.775.4 21.518.202 3.765 3.281.4 24.729.833 2.976.045.002.2 21.874 3.345.710.370 2.897.7 18.287 2.802 2.176 2.7 24.3 24.661 Canadian Domestic Gasoline Sales (M3) 2.6 24.291.743 2.073 2.044 2.321.003.619 2.7 29.9 19.026 2.1 23.022.669.335 2.180.011 2.499 2.469 4.767.295.7 28.735.409.097 2.2 27.142.967 2.281 2.458.192.141 3.114 3.108.7 29.122.8 27.844.4 24.455.412 2.3 23.480.473.725.934.637 3.113.315 2.9 22.456 2.633 2.801.682 3.2 26.201.7 26.130 3.1 23.209.804 3.202.633.498.558.287.5 30.798.

825.112 3.483.660 3.799 2.148.597 2.264 2.566 3.324 2.961.679.261.516 3.123.675 2.617 2.8 24. demand.692.346 2.656 3.796.703 3.2 26.648 3.195.048.7 21.0 26.658.537.480 2.037 3.315.205 2.179.8 28.324.4 26.928 3.649.797.669 2.791 3.864 2.555.222 2.4 20.336.426.505 2.198.644 3.881.753 3.068.4 26.601 3.317 2.773.294 3.082.671.244 3.977.165.074.182.170 Canadian Retail Gasoline Sales (M3) 2.863.382.130 3.7 22.0 26.344 3.714 2.155 2.8 25.8 20.1 24.414 3.149.521 2.2 25.906.649.607.940 2.919 2.219 Canada Avg ex tax RUL pump price (¢/l) 27.204.0 25.970.997 2.8 21.250.539.9 29.999 3.519.4 25.638 2.984 3.9 27.363.620.965.170 3.9 22.593.840 2.320 3.184.055 2.5 source: Statistics Canada (production.614.7 19.857.2 25.936 3.904.830 3.386 3.986.467 2.198 2.6 20.370.7 Canada Avg RUL Rack Price (¢/l) 20.5 25.442 2.264 2.Net Canadian Closing Supply: Gasoline Canada Production (M3) Inventory (M3) Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 3.005 2.5 21.606.198.390.077.806.376.1 21.006 3.338 2.871 3.717.0 25.141 2.214 2.667 Canadian Domestic Gasoline Sales (M3) 3.5 21.097.6 20.386 3.930.994 3.785. inventory) / Natural Resources Canada (price) MJ ERVIN & ASSOCIATES 89 .889.469.415 2.0 24.

7 57.4 56.2 65.2 62.9 56.3 49.9 53.5 58.6 47.5 58.5 58.4 46.4 52.8 56.6 59.6 52.9 61.4 55.9 53.1 53.6 46.8 41.9 61.3 54.7 65.5 54.4 57.9 50.1 52.0 58.1 49.4 61.5 59.4 65.0 39.4 55.9 56.7 53.5 56.9 49.9 47.6 56.0 59.5 51.9 56.9 61.6 48.9 52.9 44.5 51.9 58.2 51.0 61.6 55.5 47.6 54.5 59.5 51.3 51.5 59.6 50.9 56.7 51.7 45.9 52.8 56.5 58.7 50.7 50.9 61.7 White Rock Calgary 45.7 54.9 58.4 55.8 59.9 58.9 58.5 53.4 47.9 64.7 46.8 48.9 53.0 55.4 57.9 52.9 58.7 51.4 53.3 61.6 50.5 Vancouver 53.7 48.9 61.3 48.2 50.5 57.9 64.7 49.9 53.1 55.3 52.4 61.7 51.1 56.4 52.8 53.0 62.2 59.6 44.0 Sioux Lookout 62.5 58.7 65.9 52.0 61.2 61.8 53.4 52.5 58.9 47.1 44.4 59.3 49.3 52.8 52.8 57.2 62.2 43.9 55.5 57.8 47.6 47.4 58.5 58.5 57.7 53.8 44.2 56.9 56.6 46.4 56.9 47.5 61.1 49.7 48.6 55.5 55.3 52.9 52.0 59.5 47.9 51.3 48.2 65.7 65.5 53.8 52.0 52.9 52.8 50.5 59.8 49.9 49.3 50.2 63.5 55.4 46.9 55.9 53.9 54.4 52.9 62.2 58.9 52.0 62.9 56.7 44.5 53.2 62.9 53.9 49.2 50.8 48.5 57.3 59.9 51.7 65.5 59.0 48.0 44.8 64.4 48.5 57.5 57.4 56.7 63.6 54.1 53.1 43.2 47.5 59.5 59.4 52.9 54.9 55.8 54.9 54.2 48.8 52.9 44.9 53.5 49.6 51.6 47.7 62.7 57.7 53.5 60.6 53.7 54.0 61.1 55.1 52.6 58.5 51.9 62.9 53.5 50.4 49.0 61.4 54.8 45.8 56.2 62.3 56.4 58.5 45.4 63.2 62.8 59.5 60.2 46.5 57.9 55.8 56.5 46.2 62.8 57.6 48.4 56.2 55.4 53.6 62.9 51.8 Thompson 59.5 57.5 57.4 56.9 59.2 46.8 50.5 57.9 56.5 58.6 49.9 54.2 Nanton Peace River Regina 49.0 57.9 51.Study Markets RUL Pump Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Victoria 54.5 58.3 52.6 48.8 53.7 52.5 57.9 54.3 42.6 53.8 53.0 62.5 58.9 46.3 54.8 51.1 50.5 57.9 61.7 54.8 48.9 64.2 62.8 48.8 55.0 61.5 58.5 56.5 54.4 50.5 60.5 52.1 55.5 60.2 57.2 50.9 45.5 45.5 56.9 57.2 51.4 55.2 54.9 57.0 61.1 60.9 54.5 56.2 54.3 62.1 50.9 48.4 55.8 52.7 45.7 62.5 61.8 52.9 53.9 63.2 62.0 54.4 61.9 64.4 Winnipeg 49.5 56.0 61.0 50.9 56.7 52.8 56.9 53.3 50.4 56.2 62.5 60.9 64.2 54.5 57.9 MJ ERVIN & ASSOCIATES 90 .0 46.9 54.1 59.4 54.5 58.9 54.2 46.Table D: Pump Price History .2 51.5 59.4 55.5 47.5 51.0 52.4 53.7 65.1 49.9 56.5 62.9 56.4 54.9 56.6 58.1 44.3 52.9 53.5 59.8 56.9 47.5 52.1 41.8 47.4 46.5 60.3 55.9 59.3 55.

7 56.1 59.5 59.6 63.2 56.6 55.6 52.2 59.5 55.1 51.6 56.4 54.5 55.4 55.4 58.5 53.5 64.5 56.8 50.6 61.3 54.8 54.4 58.9 64.9 57.9 58.3 55.9 54.0 57.3 49.0 59.2 52.9 53.7 58.8 52.0 55.7 56.1 58.9 56.0 50.4 52.5 60.2 Montreal 63.3 52.4 58.1 60.9 62.2 56.2 61.9 49.9 63.1 49.1 51.2 53.9 56.6 55.0 60.2 57.8 50.2 60.1 52.1 Toronto 52.7 52.7 52.6 58.8 Halifax Charlottetown 60.7 48.1 55.4 57.7 53.1 55.9 53.8 55.7 57.4 57.5 61.0 53.6 49.8 49.5 52.9 61.1 54.5 54.4 53.0 53.6 58.1 57.4 58.5 56.0 56.4 51.9 50.0 60.1 54.0 52.1 56.2 52.5 57.2 Chicoutimi Gaspé Saint John 60.7 60.4 54.2 56.2 54.7 49.8 61.5 52.9 56.7 57.4 53.7 53.9 64.4 57.5 63.7 64.3 54.0 48.2 61.2 56.2 52.5 51.5 53.5 48.6 55.0 54.7 44.1 58.2 55.7 51.3 59.9 54.9 51.2 54.9 55.2 58.3 56.4 51.0 53.6 55.3 53.4 54.7 51.0 52.3 54.7 51.0 55.2 56.1 54.9 55.1 56.9 54.8 55.6 55.8 55.6 58.3 54.6 58.5 61.0 57.4 54.9 57.7 57.8 55.5 54.9 55.0 48.2 49.0 60.2 56.2 57.0 61.9 61.8 63.0 56.8 51.5 57.Study Markets (cont’d) RUL Pump SS Marie Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 52.7 47.6 50.6 54.5 63.7 54.7 57.4 60.6 53.2 54.3 51.9 57.9 58.9 55.5 53.8 55.1 53.0 55.6 51.1 55.1 61.5 58.7 56.3 58.3 53.5 51.4 58.2 57.0 54.6 55.6 54.7 59.8 55.1 55.7 58.4 54.0 50.0 47.0 52.6 Canada Avg 55.4 50.Table D: Pump Price History .0 61.2 51.5 55.8 54.9 56.6 52.2 56.3 54.4 57.3 55.3 56.5 51.3 53.3 56.0 54.4 54.2 51.5 54.3 54.8 50.4 52.9 60.6 57.2 57.3 54.1 48.4 49.0 52.6 59.3 55.3 59.5 54.2 56.2 59.6 53.5 53.6 49.1 57.9 55.6 54.7 56.5 MJ ERVIN & ASSOCIATES 91 .2 57.1 61.8 59.8 53.5 54.6 50.1 61.6 52.3 52.9 55.0 57.5 57.5 54.3 53.8 55.1 56.6 63.6 50.8 54.1 52.7 54.8 55.7 55.6 58.6 56.2 53.9 60.0 52.0 50.2 55.2 57.7 48.0 51.0 58.9 60.8 49.3 56.0 55.2 58.5 60.7 54.3 52.6 63.4 54.6 60.6 52.1 59.9 53.5 59.9 61.8 56.9 55.3 56.0 52.1 55.8 54.2 61.1 53.2 55.4 53.2 57.9 49.2 58.6 52.7 54.3 59.7 59.2 57.5 52.1 53.5 51.0 51.4 51.2 49.1 60.7 54.6 56.4 57.2 49.2 49.4 53.5 57.2 55.3 54.8 60.0 55.0 57.7 56.6 51.8 53.5 52.2 57.7 56.0 56.8 57.2 54.3 54.8 57.8 53.7 57.2 55.2 60.2 55.5 56.8 57.6 54.5 Ottawa 58.9 61.6 54.1 54.1 51.9 57.6 56.6 61.7 50.6 52.9 55.4 54.1 54.9 64.6 59.3 52.1 52.8 56.0 55.0 59.1 57.0 49.7 51.6 51.9 55.1 58.3 49.2 54.6 52.8 52.9 49.5 59.8 47.2 51.9 53.5 56.3 61.6 53.8 60.9 53.5 57.5 61.7 54.1 54.3 55.3 55.9 55.9 52.3 57.7 52.5 64.3 60.6 59.2 57.8 61.3 53.3 62.1 53.1 58.4 55.0 47.5 67.2 50.0 60.1 53.9 61.0 59.5 56.4 57.9 49.1 55.4 58.2 53.5 63.3 59.0 54.6 55.4 45.3 55.7 46.6 54.6 54.6 53.5 54.

9 30.7 29.4 27.1 24.4 31.5 Oct-95 30.3 26.1 25.3 30.4 25.5 Feb-92 28.4 22.8 24.5 27.0 27.8 Dec-93 26.8 28.2 Nov-92 31.9 Jul-93 28.0 Jun-93 26.0 31.9 27.9 29.8 Toronto extax 26.3 29.0 29.7 Mar-94 28.3 29.7 28.9 28.6 27.4 Dec-92 31.8 25.9 26.2 24.7 Jan-92 31.4 25.2 26.6 30.6 Aug-95 30.4 23.6 29.1 26.7 Sep-94 32.9 24.4 MJ ERVIN & ASSOCIATES 92 .8 29.3 27.0 28.9 21.8 28.6 22.3 32.9 30.9 24.6 25.3 27.0 32.3 30.8 21.9 23.9 29.9 23.1 26.1 27.6 26.4 22.2 29.0 23.0 23.6 24.9 26.5 21.8 29.2 32.6 Jun-92 32.6 26.3 21.4 31.7 26.0 25.6 28.9 28.5 Nov-95 30.3 28.4 31.4 28.0 27.5 23.8 27.2 27.2 28.5 Jul-95 30.1 25.8 29.6 Mar-93 28.6 23.7 30.7 30.0 24.5 27.7 30.5 29.1 28.3 29.3 24.9 24.4 20.7 28.3 26.3 23.5 29.9 26.4 Mar-92 28.4 23.3 29.7 29.3 26.8 24.2 27.8 27.0 23.8 27.1 22.3 Jan-93 30.1 23.0 May-92 28.0 24.4 29.8 Jan-94 25.2 26.4 29.4 30.8 24.7 28.Table E: Ex-tax Pump Price History .4 27.4 23.1 Feb-93 29.Study Markets RUL Extax Victoria extax Vancouver ex Calgary extax tax 32.5 27.1 25.4 27.5 24.3 30.3 29.3 33.5 23.3 26.1 Apr-95 30.3 30.9 31.7 27.6 24.3 28.9 24.0 23.6 28.2 26.9 27.3 28.6 29.0 25.3 31.2 28.4 24.4 29.5 21.8 27.8 25.9 25.2 Nov-93 27.6 26.1 25.9 24.4 20.4 31.5 24.6 22.6 30.1 24.3 Feb-95 26.6 26.4 31.5 Aug-94 28.4 20.8 22.4 29.1 27.6 26.2 23.3 29.4 24.8 26.7 29.6 26.2 Nov-94 29.1 Apr-94 29.4 26.5 29.2 22.9 25.0 Apr-92 30.7 29.7 28.5 29.8 28.9 26.8 27.8 26.5 29.2 24.6 26.3 28.6 27.2 24.2 Dec-94 26.5 Oct-92 30.9 Aug-93 30.7 30.8 26.4 30.7 Winnipeg extax 27.2 26.6 29.4 27.9 25.6 25.3 Dec-95 Edmonton Regina extax extax 27.7 28.1 24.8 25.7 Aug-92 24.4 21.6 23.6 23.3 29.0 26.3 29.4 25.2 25.9 25.3 24.1 31.7 31.9 20.1 30.9 25.2 29.2 Jun-94 31.0 Oct-93 28.7 26.8 31.2 25.0 22.7 Jan-95 27.3 Jul-92 31.4 Jun-95 30.2 28.7 26.6 21.3 28.7 28.3 23.7 27.6 Sep-93 28.1 19.8 27.6 30.9 27.4 25.5 27.4 27.7 24.0 31.5 28.3 29.8 23.4 29.5 27.9 29.1 20.8 26.0 26.9 21.3 26.4 31.1 Mar-95 29.7 26.3 24.3 May-94 28.9 28.5 26.5 Jul-94 29.1 28.6 26.6 27.5 24.4 25.1 31.4 29.9 28.6 27.9 27.6 29.3 29.0 21.4 30.6 23.0 24.4 31.9 30.0 23.4 22.8 29.7 Sep-95 30.7 25.9 Oct-94 32.0 26.4 30.2 24.2 Apr-93 28.0 May-93 29.1 22.5 26.5 25.4 28.7 30.4 29.4 28.7 24.1 30.6 May-95 29.8 Feb-94 24.2 28.0 25.5 Sep-92 29.8 24.

1 29.0 33.4 32.2 22.1 34.7 Quebec extax 32.0 33.8 23.5 33.4 32.3 26.7 24.8 25.8 29.8 23.0 36.9 27.2 36.5 31.1 29.6 32.2 32.9 32.0 36.5 28.7 28.9 35.3 31.6 23.6 34.5 25.4 32.6 28.3 25.1 32.3 29.9 30.4 25.3 28.3 23.2 27.2 24.0 29.7 23.8 28.6 34.0 29.0 26.7 28.6 26.2 25.5 28.7 34.1 24.1 26.6 36.2 27.0 28.8 28.5 26.1 28.8 26.6 27.3 28.7 22.2 21.2 30.3 25.0 32.5 31.6 23.9 37.3 33.6 29.9 32.9 29.0 34.9 30.5 27.0 23.0 26.5 28.8 28.3 34.6 32.8 25.2 32.9 30.8 32.0 28.2 27.8 29.8 27.4 24.1 24.2 Saint John Halifax extax extax 34.9 31.5 34.9 29.4 25.0 23.9 32.9 32.3 28.6 26.6 28.8 28.7 23.1 30.0 29.7 32.6 33.6 32.9 31.1 25.9 30.9 26.7 24.5 33.2 26.7 26.2 25.4 31.4 26.8 26.5 27.9 23.4 25.3 31.3 26.6 31.4 34.3 29.2 33.7 26.9 27.3 22.0 31.2 25.3 26.6 25.2 36.8 30.5 30.2 25.9 27.5 24.8 23.6 33.8 26.3 28.8 32.0 28.2 26.8 30.0 34.1 24.7 27.9 27.7 25.2 26.8 27.9 29.0 25.4 25.4 36.4 28.7 24.8 36.0 25.4 33.7 26.5 30.3 30.2 30.4 26.3 34.3 31.2 34.7 30.6 25.7 28.8 25.Study Markets (cont’d) RUL extax Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Ottawa extax 31.1 32.1 34.2 23.7 32.5 26.8 28.7 28.9 28.2 26.5 28.5 25.2 22.6 32.2 22.3 35.9 29.2 27.7 27.4 33.6 Charlottetown extax 36.8 26.0 34.5 25.0 32.8 23.7 24.2 27.0 26.6 28.5 36.4 26.Table E: Ex-tax Pump Price History .7 30.9 33.2 33.2 27.3 28.5 29.8 33.1 Montreal extax 31.9 26.3 29.1 32.2 32.0 30.7 32.0 25.8 30.0 33.3 24.6 27.7 34.6 32.4 24.0 33.6 29.0 33.2 22.5 25.8 29.0 28.8 28.7 28.9 24.2 27.7 MJ ERVIN & ASSOCIATES 93 .7 26.3 25.3 34.2 28.3 25.4 21.6 26.7 33.6 24.2 29.7 27.5 25.9 30.9 29.9 28.5 32.7 27.7 26.4 33.7 29.5 27.0 30.8 29.9 29.6 28.4 31.4 31.2 27.4 36.1 24.1 32.3 29.7 26.4 22.0 28.5 25.1 28.5 33.3 27.6 28.2 28.6 31.8 24.2 27.1 23.3 27.6 22.5 24.1 34.1 30.3 31.8 32.1 22.1 30.8 27.8 29.3 31.4 33.9 27.1 26.2 30.9 29.4 33.4 28.9 26.6 27.8 25.9 33.1 31.6 36.1 29.8 26.8 Canada Avg extax 29.7 23.0 27.4 27.8 32.7 29.2 24.2 28.2 26.8 33.6 26.3 29.5 27.7 24.8 27.5 30.

8 20.9 24.4 15.1 19.7 21.8 23.4 21.0 20.0 22.7 21.3 22.7 20.8 18.6 25.4 22.2 23.3 18.1 21.9 21.8 22.6 23.4 23.1 20.4 17.3 20.8 18.2 21.8 23.4 22.0 21.3 17.5 23.4 21.1 22.1 21.6 23.0 19.0 23.4 20.3 22.2 18.2 20.1 21.7 17.8 19.1 20.6 20.7 21.4 22.7 18.9 25.3 22.0 21.6 19.4 22.2 22.5 17.4 20.9 21.1 18.5 21.3 21.3 18.3 18.1 23.Table F: Rack Prices .1 21.6 23.2 21.4 23.3 23.6 20.9 21.8 18.9 21.4 22.1 24.7 19.5 22.4 21.4 21.5 21.3 20.0 23.1 22.2 18.2 16.8 18.7 23.2 23.3 23.7 22.7 22.7 22.7 23.2 21.9 22.1 Halifax rack 20.6 23.2 18.2 20.3 23.9 22.0 21.6 21.4 22.7 22.3 17.8 22.4 21.2 19.1 21.1 21.8 23.8 20.0 22.5 20.4 24.1 20.0 19.2 20.1 22.0 22.5 24.4 19.5 17.1 23.7 21.5 24.5 18.3 20.2 21.9 20.5 21.4 22.3 17.2 21.7 22.1 20.2 23.6 19.8 22.6 19.3 23.1 20.5 23.6 23.0 21.9 22.2 19.9 18.0 21.0 23.7 22.2 Quebec city Montreal rack Toronto rack rack 19.1 22.6 18.8 22.5 21.6 20.3 24.9 23.7 22.1 21.2 22.4 21.9 20.7 20.8 22.9 22.2 18.6 20.0 21.1 19.7 20.9 19.1 22.4 21.7 22.6 19.1 15.8 20.1 20.2 23.2 21.8 19.1 22.9 20.4 21.9 22.9 18.4 20.0 24.2 17.1 21.5 21.4 22.4 22.5 21.6 20.0 22.7 17.5 21.8 20.8 23.3 23.8 21.8 19.2 16.6 25.5 24.8 Ottawa rack Thunder Bay rack 20.5 19.8 23.7 18.6 25.8 23.0 21.6 22.4 21.3 21.9 18.0 20.4 20.3 19.3 26.8 21.5 23.3 23.5 22.0 23.1 20.9 21.2 21.0 23.3 19.8 21.2 20.5 22.3 22.8 21.5 19.4 23.5 21.7 16.5 22.3 21.9 21.6 20.4 18.4 22.8 25.1 23.4 21.7 21.2 18.6 23.2 29.4 20.6 20.5 22.7 MJ ERVIN & ASSOCIATES 94 .Study Markets RUL Rack Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Saint John NB rack 21.5 20.0 23.7 21.3 23.5 17.1 15.1 16.9 23.6 19.4 21.4 22.6 19.3 19.9 22.4 21.8 23.7 17.8 21.7 21.0 19.2 22.3 21.2 20.2 21.0 22.4 23.3 21.2 19.0 23.1 19.5 26.3 24.8 24.0 22.2 16.9 17.5 20.2 20.9 22.1 20.5 27.7 22.5 20.4 21.8 21.0 23.8 20.8 27.5 22.9 18.7 19.1 22.8 20.3 20.6 21.3 19.5 18.8 19.

7 21.4 21.1 21.9 21.5 23.7 22.3 24.6 21.8 23.8 21.6 17.9 21.2 24.6 22.7 20.1 25.6 25.8 23.5 21.0 22.4 21.0 23.5 23.1 22.9 21.1 22.4 21.Table F: Rack Prices .4 22.5 19.3 20.5 22.6 22.2 22.1 21.1 20.7 25.9 21.6 24.7 21.9 18.7 23.0 22.0 24.0 22.5 23.5 19.7 24.9 20.7 22.8 22.8 23.7 21.1 18.5 21.1 19.0 20.8 20.5 22.1 23.2 22.9 22.3 23.8 24.0 22.4 19.7 17.8 Vancouver Victoria rack rack 24.5 23.8 22.8 20.3 23.6 21.0 21.4 23.1 21.3 18.5 21.8 22.7 18.3 23.7 21.5 24.7 22.4 20.4 24.9 19.5 21.2 24.1 16.1 17.6 21.2 21.6 23.9 22.4 23.6 21.3 23.4 22.1 21.5 20.7 21.Study Markets (cont’d) RUL Rack Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Winnipeg Regina rack Calgary rack rack 24.2 19.9 22.0 22.4 22.9 19.6 23.9 21.4 21.5 22.6 20.5 24.6 24.9 18.0 25.0 17.5 23.9 21.0 20.0 22.3 22.3 20.0 20.7 21.1 21.5 24.0 22.9 23.7 23.9 21.6 17.7 22.1 23.9 24.0 24.2 22.7 24.9 22.7 23.5 21.0 18.3 20.5 22.9 20.4 25.6 21.1 20.5 19.9 24.2 22.7 21.0 17.4 22.6 23.4 23.8 22.9 21.0 22.6 25.4 21.3 21.8 19.2 24.6 25.0 23.3 22.0 20.4 22.9 19.5 19.8 20.7 22.3 17.2 21.2 21.2 23.0 21.1 23.2 23.5 21.9 20.0 24.2 18.2 20.6 19.8 18.4 20.5 Canada avg rack 22.6 21.6 21.2 24.0 23.1 23.2 22.3 24.9 19.9 23.2 21.4 23.5 24.8 24.0 24.1 23.5 MJ ERVIN & ASSOCIATES 95 .1 22.4 24.1 21.4 24.6 20.1 22.9 19.8 21.0 21.3 23.6 23.1 20.5 17.7 22.0 18.1 24.4 21.7 17.2 20.5 20.2 22.5 20.6 23.5 23.5 21.2 24.5 22.9 19.3 21.9 23.2 23.5 22.3 24.4 19.7 22.3 24.6 21.9 17.1 19.2 19.2 21.7 21.3 23.3 19.7 19.6 22.7 21.4 24.1 21.7 22.2 20.9 23.8 21.7 21.1 22.8 22.2 20.0 23.2 22.9 22.9 23.9 24.9 19.7 22.3 17.9 21.3 22.3 19.5 18.6 21.2 22.8 20.7 21.3 22.9 23.4 21.1 23.3 21.5 18.6 23.5 20.5 21.8 20.1 21.3 21.6 20.3 23.7 21.1 23.5 23.1 25.6 22.1 23.1 23.0 23.6 23.6 20.8 23.9 22.0 21.7 25.5 21.7 23.4 18.2 23.1 23.5 21.6 19.4 21.3 17.7 23.0 21.1 25.2 23.8 22.7 24.6 21.9 22.1 16.8 21.1 18.8 25.2 Edmonton Rack 23.7 22.6 23.2 23.2 20.8 24.1 22.9 22.9 22.3 20.

20 61.214 248.702 333.749 243.018.620.60 60.40 63.636.32 51.832 91.20 54.78 67.796 529.894 1.90 63. MJ ERVIN & ASSOCIATES 96 .89 60.60 49.18 51.45 63.745.60 70.621 102.26 44.211 15.90 62.30 52.30 54.73 65.70 49.07 61.334.30 66.02 51.712 1.74 57.10 53.246 2.905 183.810.166 102.30 63.00 57.018 2.50 56.89 61.949 1.790 185.Table G: Study Market Data .150 48.483 63.500 378.88 54.28 65.834 71.11 58.412 722.153 316.38 56.97 63.40 61.052 84.597 2.933 25.060.65 54.000 1.97 51.30 54.89 65.796 2.056.557.60 50.26 49.120 570.400 142.19 49.438 591.23 63.16 59.686 273.922 103.72 58.554 2.460 833.85 48.174.370 41.997 397.009 54.014 3.858.945.42 53.26 63.508 2.000 1.935 758.549 111.13 58.192 2.40 59.296 179.669 203.80 64.35 73.00 66.92 51.141.19 52.985 636.678.513 19.53 61.40 54.70 55.Throughput and Price by Grade 1995 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Group B All Study Mkts Average Throughput (Litres) Premium Midgrade Regular 661.55 58.36 54.897 350.702.971 473.234 799.72 63.625 64.204.10 52.972 429.98 59.50 55.40 58.543 2.249.241 451.414 450.704.23 53.698 Note: Regional.614 3.45 53.86 56.890 2.895 600.88 64. and All Study Markets are weighted (by market population) averages.238 2.34 63.113 2.245 351.332 101.811 120.145.90 67.268 478.173 568.30 68.030.903 33.10 63. Urban.20 60.00 62.377 30.83 68.53 48.102 98.22 59.94 55.196 669.72 74.420.628 702.529 123.980 120.101 447.749 91.119 632.66 50.17 Diesel 64.859 240.00 48.48 56.194.25 57.770 2.03 58.101 256.327 Average Pump Price (¢/litre) Premium Midgrade Regular Diesel 63.30 57.300 578.837 329.20 59.250 748.00 57.85 54.220 389.50 56.000 63.00 67.671 399.87 61.20 58.10 59.475 1.643 184.24 61.093.058 2.483 2.983 1.687 1.298 576.516.448.000 217.830 2.850 126.93 63.

83 24.42 25.09 27.78 Product taxes Midgrade Regular 26.49 21.99 28.43 21.47 28.31 22.49 25.95 25.45 24.51 31.33 21.91 21.32 33.96 24.65 27. and All Study Markets are weighted (by market population) averages.06 28.15 24.45 25.32 21.38 24.69 23.63 24.55 28.21 27.01 28.93 23.39 22.07 24.33 21.65 21.59 28.89 28.73 26.17 20.04 26.59 28.92 21.90 27.34 25.98 28.28 22.38 24.20 27.45 24.87 26.Table H: Study Market Data .89 29.15 29.23 23.74 21.81 28.34 20.88 20.03 24.98 25.59 28.43 28.30 29.82 28.96 22.73 32.16 21.69 27.21 27.50 25.25 28.33 21.49 21.47 20.83 22.02 23.07 26.43 20.23 26.41 22.Rack Price.39 21.97 23.55 28. MJ ERVIN & ASSOCIATES 97 .47 27.51 25.93 27.63 25.39 Note: Regional.65 26.42 27.89 26.45 20.04 24.59 22. Tax (by Grade) Rack Pt.90 26.37 27.75 27.45 22.76 24.59 22.15 27.08 25.40 25.09 24.59 24.88 28.51 25.40 27.51 20.85 28.82 21.97 25.63 20.95 22.92 20.03 20.45 20.54 28.99 26.57 29.58 25.45 20.07 26.97 22.25 27.33 22.83 25.76 25.16 22.18 25.95 Premium 26.83 23.26 28.36 24.81 25.43 21.92 30.33 21.11 26.15 20.83 24.33 27.92 22.26 27.88 22.41 27.35 25.45 20. Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Group B All Study Mkts Victoria Vancouver Vancouver Calgary Regina Winnipeg Calgary Edmonton Winnipeg Toronto Ottawa Toronto Winnipeg Montreal Quebec Montreal Saint John Halifax Halifax 1995 Average Rack Price (¢/litre) Premium Midgrade Regular Diesel 26.88 22.07 24.34 26.08 23.13 23.88 28. Urban.45 29.36 26.25 24.39 21.94 23.63 28.57 22.23 25.93 23.45 28.39 22.83 24.48 25.42 24.18 28.63 26.53 23.27 20.45 23.84 28.75 22.88 20.42 24.33 22.63 21.95 22.81 27.03 21.43 20.01 22.20 20.81 21.07 24.33 22.50 20.96 24.64 28.49 31.84 28.33 21.45 29.89 25.23 24.68 Diesel 36.28 23.56 22.25 31.16 29.27 29.

33 9.77 30.11 31.13 0.32 31. MJ ERVIN & ASSOCIATES 98 .56 4.26 27.24 7.30 5.88 31.36 20.99 0.93 22.86 28.22 5.25 1.64 3.24 23.17 1.96 28.72 26.57 12.77 5.26 3.04 22.07 0.96 27.03 28.80 9.13 28.18 7.26 5.38 0.31 34.18 55.44 25.66 28.75 28.07 0.83 27.83 36.85 11.02 0.14 60.83 1.44 56.63 58.35 60.17 9.34 1.29 7.58 1.30 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Variance Avg Deviation Group B Variance Avg Deviation All Study Mkts Variance Avg Deviation 57.16 3.20 14.70 22.22 14.24 7.91 2.89 28.63 60.05 6.03 7.29 8.73 2.38 2.21 8.68 7.50 58.91 29.11 26.39 56.45 6.02 22.85 24.04 28.20 5.99 2.36 0.02 3.60 23.91 0.84 5.58 66.41 29.14 7.95 6.90 23.86 49.44 33.28 27.00 58.08 0.71 33. and All Study Markets are weighted (by market population) averages.81 26.43 0.12 23.Blended Prices.68 7.83 12.08 3.06 0.80 1.98 31.35 28.27 11.(∑x)2 ]/n2.27 62.41 12.51 11.31 23.10 6.43 23. Urban.23 7.33 .06 5.96 25.04 23.00 22.82 3.01 0.94 Note: Regional.50 0.27 6.75 23.89 21.88 5.98 0.73 22.82 32.84 28.59 4.19 5.53 21.96 3.30 12.90 59.35 27.91 22.76 5.94 17.41 7.033 0.02 13.31 28.38 28.50 3.64 3.29 24.06 28.42 2.50 10.15 66.62 56.56 24.93 56.12 6.98 1.95 21.08 55.21 24.22 1.35 58.82 95 Retail Gross Product Margin 6.47 58.10 3.53 6.21 8.28 56.28 1.60 14.97 0.38 7.16 20.31 0.48 7.38 22.52 5.00 4.28 1.00 0.01 31.83 21.98 0.64 1.04 0.54 50.73 1.92 22.18 21.17 11.77 37.34 0.78 2. Average Deviation is the average deviation of the market values from their mean (average) value.07 30.13 11.53 22.27 60.94 22.60 7.47 0.49 2.73 10.08 17.17 26. Variance uses the formula [n∑x2 .81 28.85 26.85 21.37 26. Costs.89 0.23 38.52 30.45 1.79 0. Margin Cents per Litre 95 Blended Pump Price 95 Blended tax 95 Blended Extax Price 95 Blended Rack Price 95 Retail Freight Cost Gross Marketing Margin 6.16 54.64 2.Table J: Study Market Data .79 33.68 2.49 57.

208) $ (226.780 $ 85.265.800 $ 225. and All Study Markets are weighted (by market population) averages.465.550 $ 177.217 2. Outlet Costs.719 3. Revenue. For 95 net retail petroleum revenue.746 $ (374.032 $ 77.542 $ 222.014.Table K: Study Market Data .640 4.638 2.890.095.000) $ (241.071.367) $ (164.209 $ 82.855 $ 278.068 3.794 3.467 $ 96.520 5.805. Income Average Outlet Sales (litres) Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Group B All Study Mkts 3.004. outlet costs.120 $ 54.244 95 net retail Ancillary Revenue petroleum revenue $ 208.911) $ (166.011.224 $ 189.557) $ 102.143) $ (249.081 $ 222.630 3.010 1.993 $ 113.067 $ 92.544 $ 175.197.646) $ (98.837 $ 56.772.481 $ 96.948 3.716 Note: Regional.502 $ (80) $ 60.295 $ 174.246 $ 118.856 3. Urban.875 $ 255.648 3.900 2.766) $ (274.623 2.934 3.209 $ 26.272 $ 210.707 $ 260.332) $ (238.885.074 $ 131.827. MJ ERVIN & ASSOCIATES 99 .871) $ (128.223.694 3.510 $ 60.098.098 $ (320. but for ancillary revenue. and consolidated outlet income these averages are based only on those markets with available data.375) $ (49.779 $ 121.622 $ 174.526 $ 207.626 $ 81.750 $ 271.478 4.542.247 4.604.429 $ 238.913 $ 139.966 3.550 694.995 $ 234.658.956) $ 200.272 $ 118.241) $ (227.066 3.102 $ 223.688 $ 85.900 $ 179.289 981.144 2.302 $ 69.263 $ 60.000 $ 156.866) $ (244. these averages are based on all applicable study markets.157.677 $ 180.023 $ (15.564 $ 252.279 $ 154.000 2.116 Outlet costs 95 Consolidated Retail Outlet Income $ 126.117 $ 207.852) $ 119.089.013 $ 227.394.632 $ 256.250.135 $ 199.129 $ 97.058.572) $ (286.Sales.

50 3 10.24 0. 106 446 8 313 86 261 5 8 6 546 209 24 3 866 97 8 56 113 23 rank 8 3 14 4 10 5 18 14 17 2 6 12 19 1 9 14 11 7 13 No.88 12 7.675 179.41 1.550 1.45 0.775 678.84 12 5. 12 18 4 27 15 17 4 6 5 30 19 10 3 32 14 6 9 9 5 Freight ¢/l 0.30 1. inverse ranking is used (lowest value = 1).27 0. N refers to study sample size (total = 481).775.10 3.47 14 3.315 710.94 18 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown Avg Volume per Outlet Marketing Margin 000's litres 3.098 4.157 2.60 11 7.870 120.02 0.089 3.90 13 4.975 2.54 6 2.27 1.30 0.04 15 4.542.145 81.250 981 2.45 14.41 0.095 3.89 2 4.79 6. rank* 3.38 0.73 14.43 12.890 rank 9 4 5 3 10 8 15 13 16 1 2 6 19 7 12 18 14 11 17 ¢/l 6.275.08 3.85 15 11.29 8 7.42 5 14.658 3.071 2.01 7 2.585 6.68 4 7.33 0.745 16.605 16.97 8.51 9 11.08 16 3.180 616.60 3.395 rank 8 3 14 4 9 6 19 17 16 1 5 11 18 2 10 13 12 7 15 No.98 7.55 19 11.91 12.000 pop’n No.004 3.23 6 7.47 7.014 5.790 1.223 3.827 3.95 3 9. of Brands No.40 9 4.06 1 5.475 3.29 1.06 16 4.00 11. of Outlets No.Table L: Study Market Data .310 1.265 2.845 15.058 1.48 7 7.715 14.13 2 11.03 14 N= 26 37 5 69 30 61 2 4 4 59 39 12 2 74 16 2 17 18 4 Note: Where an * appears after “rank”.80 10 4.17 rank* 7 9 9 6 8 11 3 16 17 1 4 12 18 2 15 19 13 5 14 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown Gross Product Margin ¢/l rank* 6.604 3.22 3.76 18 5.17 19 9.96 5.20 0.20 17 14.465 694 3.89 7.73 5 10.91 17 4.394 2.36 5.400 74.40 1 3.88 11 8.21 0.53 10 6.23 8 31.98 6.28 17.50 9.970 330. MJ ERVIN & ASSOCIATES 100 .22 0.08 4 2.52 13 5.06 5.14 rank* 10 9 12 3 1 2 10 16 17 7 6 15 18 7 13 19 4 4 14 rank 9 5 17 3 7 6 17 13 15 2 4 10 19 1 8 13 11 11 15 Est Outlets / 10.50 8.Demographic Profiles Population pop’n 299 .

Petroleum Products Address: 235 Queen Street. safety and business issues. Vice President Public Affairs Address: 275 Slater Street. accessible through a public fax-back dial-in system. Contact: Cindy Christopher. MJ Ervin & Associates is a Calgary-based consulting organization specializing in the downstream petroleum industry. 119 . Contact: Michael J. a series of studies whose goal is to strengthen Canada’s competitiveness. The SCF is the basis for this study. Senior Advisor. They work with major oil companies in benchmarking performance in the retail. Contact: Brendan Hawley.com Natural Resources Canada Natural Resources Canada is a key information resource on the matter of petroleum prices. K1A 0H5 Phone (613) 941-6219 Fax: (613) 941-2463 MJ Ervin & Associates / Q1 Solutions Inc. Ottawa ON.III Sources of Information about the Downstream Petroleum Industry Canadian Petroleum Products Institute (CPPI) The CPPI is a national association of petroleum refining and marketing companies which serves as the voice of the petroleum products industry in Canada on environment. and in doing so.14th Street NW Calgary AB. bulk. Ottawa ON. cardlock. health. and provide background resources to industry public affairs managers and the media. K1A 0E4 Phone: (613) 992-1477 Fax: (613) 992-0614 MJ ERVIN & ASSOCIATES 101 . T2N 1Z6 Phone: (403) 283-8704Fax: (403) 283-9104e-mail: mervin@cadvision. Ottawa ON. They maintain a large database of historical prices at most major centres. generate jobs and growth. Principal Address: #400. aviation and lubricants marketing channels. Ervin. Contact: Maureen Monaghan Address: 580 Booth Street. K1P 5H9 Phone (613) 232-3709 Fax: (613) 236-4280 Industry Canada Industry Canada is the primary overseer of the Sector Competitiveness Framework (SCF).

ABT2P 3H2 Phone: (403) 264-6064Fax: (403) 237-6286e-mail: pcomm@pcf. Contact: Gerard O’Connor. It reports industry marketing trends and compiles an annual survey of retail and wholesale outlet representation. Contact: Len Bradley. no 45-004) is a useful source of supply and demand volume data.T2P 3P4 Phone: (403) 266-8700 Fax: (403) 266-6634 Petroleum Communication Foundation (PCF) The PCF is an industry funded. Supervisor. Calgary AB. Ottawa ON. Managing Editor Address: Suite 2450. K1A 0T6 Phone: (613) 951-3562 MJ ERVIN & ASSOCIATES 102 . SW Calgary.6th Ave. Its monthly publication “Refined Petroleum Products” (cat.ca Statistics Canada Statistics Canada publishes a variety of petroleum industry performance figures.Octane Magazine Octane is Canada’s refining and marketing trade journal. The PCF is a useful resource for any person or organization wishing to become better informed on general downstream infrastructure and retail gasoline price/competition mechanisms.6th Avenue. and is a useful “window” on this industry. 311 . non-advocacy organization whose mandate is to increase public awareness of Canada’s oil industry. Executive Director Address: 214. Energy Section Address: Statistics Canada. Octane is published quarterly.ab. 101 . Contact: Robert Curran.

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